##### Table of Contents









UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | Quarterly report pursuant to section 13 or
    15(d) of the Securities Exchange Act of 1934 
|          
|           |  | For the quarterly period ended March 31,
    2003                                           
|          
|o          |  | Transition report pursuant to section 13 or
    15(d) of the Securities Exchange Act of 1934
|          
|           |  | For the Transition period
    from           to                                             

Commission File No. 1-7134



---

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, CA(Address of principal executive
    offices) |  | 90066(Zip Code)                            

(310) 827-2737

(Registrants telephone number, including
area code)


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 þ          No o

Indicate by check mark whether the Registrant is
an Accelerated Filer (as defined by rule 12 (b) 2 of the
Securities Exchange Act of
1934.)     Yes o          No þ

Indicate the number of shares outstanding of each
of the issuers classes of common equity, as of the latest
practicable date.

|                              |  |                              |           | 
|----------------------------- |  | ---------------------------- | --------- | 
|                              |  | Number of Shares Outstanding
|Title                         |  | As of May 9, 2003           
|                              |  |                             
|Common Stock, $0.01 Par Value |  |                              | 6,577,334 | 



---






---

TABLE OF CONTENTS



|                             |                                                                                                |  |  |  |  |  |  | 
|---------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                             | Item 1. Financial Statements                                                                  
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                             | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             
|                             | Item 4. Controls and Procedures                                                               
|PART II -- OTHER INFORMATION
|                             | Item 1. Legal Proceedings                                                                     
|                             | Item 2. Change in Securities                                                                  
|                             | Item 3. Default Upon Senior Securities                                                        
|                             | Item 4. Submission of Matters to a Vote of Security Holders                                   
|                             | Item 5. Other Information                                                                     
|                             | Item 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                  
|CERTIFICATION               
|CERTIFICATION               
|EXHIBIT 99.2                



---



##### Table of Contents






Item 1.     Financial
Statements

MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------- | ------------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                                                                                                                                  |                                                                                                                                                                                                                             | March 31, 2003             |             | June 30, 2002
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |              
|                                                                                                                                                  |                                                                                                                                                                                                                             |                           
|                                                                                                                                                  |                                                                                                                                                                                                                             | (Unaudited)               
|ASSETS                                                                                                                                            |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|CURRENT ASSETS:                                                                                                                                   |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  | Cash and cash equivalents                                                                                                                                                                                                   |                            | $           | 5,976,000     |             |   | $           | 5,554,000  |           
|                                                                                                                                                  | Restricted Cash                                                                                                                                                                                                             |                            |             |               |             |   |             | 3,780,000  |           
|                                                                                                                                                  | Trade accounts receivable, net of allowance for
    doubtful accounts of $2,549,000 at 3/31/03 and $1,583,000 at
    6/30/02                                                                                                |                            |             | 53,397,000    |             |   |             | 46,958,000 |           
|                                                                                                                                                  | Inventories, principally aviation fuel                                                                                                                                                                                      |                            |             | 3,572,000     |             |   |             | 2,985,000  |           
|                                                                                                                                                  | Prepaid expenses and other current assets                                                                                                                                                                                   |                            |             | 3,015,000     |             |   |             | 3,077,000  |           
|                                                                                                                                                  | Income taxes receivable                                                                                                                                                                                                     |                            |             | 2,513,000     |             |   |             |            |           
|                                                                                                                                                  | Note receivable from affiliate                                                                                                                                                                                              |                            |             | 1,400,000     |             |   |             | 1,400,000  |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | Total current assets       |             |               | 69,873,000  |   |             |            | 63,754,000 | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of
    accumulated depreciation and amortization of $58,314,000 at
    3/31/03 and $53,668,000 at 6/30/02 |                                                                                                                                                                                                                             |                            | 57,329,000  |               |             |   | 59,286,000  |           
|NOTES RECEIVABLE                                                                                                                                  |                                                                                                                                                                                                                             |                            | 2,926,000   |               |             |   | 2,158,000   |           
|DEFERRED INCOME TAXES                                                                                                                             |                                                                                                                                                                                                                             |                            | 764,000     |               |             |   | 770,000     |           
|GOODWILL                                                                                                                                          |                                                                                                                                                                                                                             |                            | 4,389,000   |               |             |   | 4,389,000   |           
|OTHER INTANGIBLE ASSETS, NET                                                                                                                      |                                                                                                                                                                                                                             |                            | 1,108,000   |               |             |   | 233,000     |           
|OTHER ASSETS, NET                                                                                                                                 |                                                                                                                                                                                                                             |                            | 5,620,000   |               |             |   | 4,096,000   |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | $                          | 142,009,000 |               |             | $ | 134,686,000 |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                          |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|CURRENT LIABILITIES:                                                                                                                              |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  | Accounts payable                                                                                                                                                                                                            |                            | $           | 41,080,000    |             |   | $           | 35,085,000 |           
|                                                                                                                                                  | Accrued expenses and other current liabilities                                                                                                                                                                              |                            |             | 8,841,000     |             |   |             | 8,459,000  |           
|                                                                                                                                                  | Current portion of long-term debt (Note 5)                                                                                                                                                                                  |                            |             | 4,122,000     |             |   |             | 14,677,000 |           
|                                                                                                                                                  | Senior Subordinated Note, current (Note 5)                                                                                                                                                                                  |                            |             |               |             |   |             | 23,179,000 |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | Total current liabilities  |             |               | 54,043,000  |   |             |            | 81,400,000 | 
|LONG-TERM DEBT (Note 5)                                                                                                                           |                                                                                                                                                                                                                             |                            | 26,583,000  |               |             |   | 14,351,000  |           
|SENIOR SUBORDINATED NOTE (Note 5)                                                                                                                 |                                                                                                                                                                                                                             |                            | 23,401,000  |               |             |   |             |           
|DEFERRED GAIN                                                                                                                                     |                                                                                                                                                                                                                             |                            | 2,087,000   |               |             |   | 2,146,000   |           
|DEFERRED RENT                                                                                                                                     |                                                                                                                                                                                                                             |                            | 2,043,000   |               |             |   | 1,943,000   |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | Total liabilities          |             |               | 108,157,000 |   |             |            | 99,840,000 | 
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                                            |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|PREFERRED STOCK, Series A  $.01 par
    value; authorized 1,000,000 shares; outstanding 462,627 shares
    at 3/31/03 (Note 6)                   |                                                                                                                                                                                                                             |                            | 472,000     |               |             |   |             |           
|STOCKHOLDERS EQUITY:                                                                                                                             |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  | Preferred Stock  $.01 par value;
    authorized 2,000,000 shares; none outstanding Common
    Stock  $ .01 par value; authorized
    18,000,000 shares; outstanding 6,577,334 shares at
    3/31/03; 6,541,699 at 6/30/02 |                            |             | 66,000        |             |   |             | 65,000     |           
|                                                                                                                                                  | Additional paid-in capital                                                                                                                                                                                                  |                            |             | 21,633,000    |             |   |             | 21,419,000 |           
|                                                                                                                                                  | Retained earnings                                                                                                                                                                                                           |                            |             | 15,779,000    |             |   |             | 17,751,000 |           
|                                                                                                                                                  | Accumulated other comprehensive loss (Note 9)                                                                                                                                                                               |                            |             | (373,000      | )           |   |             | (316,000   | )         
|                                                                                                                                                  | Notes receivable from sale of stock                                                                                                                                                                                         |                            |             | (3,725,000    | )           |   |             | (4,073,000 | )         
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | Total stockholders equity |             |               | 33,380,000  |   |             |            | 34,846,000 | 
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           
|                                                                                                                                                  |                                                                                                                                                                                                                             | $                          | 142,009,000 |               |             | $ | 134,686,000 |           
|                                                                                                                                                  |                                                                                                                                                                                                                             |                            |             |               |             |   |             |           

See accompanying notes to consolidated financial
statements

2



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |           |  
|------------------------------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------------------- | ----------- | ------------------ | ---------- | ---- | ----------- | ----------- | ---------- | - | ----------- | ---------- | --------- | - | ---------- | ---------- | --------- | -
|                                                                                            |                                          |                                                            |             |                   
|                                                                                            |                                          | Nine Months Ended                                          |             | Three Months Ended
|                                                                                            |                                          | March 31,                                                  |             | March 31,         
|                                                                                            |                                          |                                                            |             |                   
|                                                                                            |                                          | 2003                                                       |             | 2002               |            | 2003 |             | 2002       
|                                                                                            |                                          |                                                            |             |                    |            |      |             |            
|                                                                                            |                                          |                                                           
|                                                                                            |                                          | (Unaudited)                                               
|Sales and Revenues:                                                                         |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Sales                                    |                                                            | $           | 263,487,000        |            |      | $           | 216,203,000 |            |   | $           | 88,151,000 |           |   | $          | 66,301,000 |          
|                                                                                            | Service revenues                         |                                                            |             | 69,397,000         |            |      |             | 67,558,000  |            |   |             | 22,876,000 |           |   |            | 21,617,000 |          
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          |                                                            | 332,884,000 |                    |            |      | 283,761,000 |             |            |   | 111,027,000 |            |           |   | 87,918,000 |           
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Costs and Expenses:                                                                         |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Cost of sales                            |                                                            |             | 234,647,000        |            |      |             | 186,331,000 |            |   |             | 78,400,000 |           |   |            | 56,948,000 |          
|                                                                                            | Operating expenses                       |                                                            |             | 78,936,000         |            |      |             | 75,387,000  |            |   |             | 26,394,000 |           |   |            | 24,455,000 |          
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          |                                                            | 313,583,000 |                    |            |      | 261,718,000 |             |            |   | 104,794,000 |            |           |   | 81,403,000 |           
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          | Gross Margin (Excluding depreciation and
    amortization) |             |                    | 19,301,000 |      |             |             | 22,043,000 |   |             |            | 6,233,000 |   |            |            | 6,515,000 |  
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Expenses (Income):                                                                          |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Selling, general and administrative      |                                                            |             | 8,205,000          |            |      |             | 7,769,000   |            |   |             | 2,746,000  |           |   |            | 3,031,000  |          
|                                                                                            | Provision for bad debts                  |                                                            |             | 1,201,000          |            |      |             | 1,247,000   |            |   |             | 442,000    |           |   |            | 475,000    |          
|                                                                                            | Depreciation and amortization            |                                                            |             | 6,053,000          |            |      |             | 7,030,000   |            |   |             | 2,049,000  |           |   |            | 2,346,000  |          
|                                                                                            | Interest expense                         |                                                            |             | 5,355,000          |            |      |             | 4,320,000   |            |   |             | 2,564,000  |           |   |            | 1,329,000  |          
|                                                                                            | Costs and expenses of stock offering     |                                                            |             |                    |            |      |             | 985,000     |            |   |             |            |           |   |            |            |          
|                                                                                            | Loss on sale of property                 |                                                            |             |                    |            |      |             | 71,000      |            |   |             |            |           |   |            |            |          
|                                                                                            | Write off of capitalized financing costs |                                                            |             | 1,773,000          |            |      |             |             |            |   |             | 40,000     |           |   |            |            |          
|                                                                                            | Interest income                          |                                                            |             | (130,000           | )          |      |             | (72,000     | )          |   |             | (45,000    | )         |   |            | (44,000    | )        
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          |                                                            | 22,457,000  |                    |            |      | 21,350,000  |             |            |   | 7,796,000   |            |           |   | 7,137,000  |           
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|(Loss) Income from Continuing Operations Before
    Provision for Income Taxes              |                                          |                                                            | (3,156,000  | )                  |            |      | 693,000     |             |            |   | (1,563,000  | )          |           |   | (622,000   | )         
|(Benefit from) Provision for Income Taxes
    (Note 3)                                      |                                          |                                                            | (1,230,000  | )                  |            |      | 271,000     |             |            |   | (609,000    | )          |           |   | (242,000   | )         
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|(Loss) Income from Continuing Operations                                                    |                                          |                                                            | (1,926,000  | )                  |            |      | 422,000     |             |            |   | (954,000    | )          |           |   | (380,000   | )         
|Loss from Discontinued Operations net of income
    tax benefit of $27,000 in 2002 (Note 2) |                                          |                                                            |             |                    |            |      | (42,000     | )           |            |   |             |            |           |   |            |           
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Net (Loss) income                                                                           |                                          | $                                                          | (1,926,000  | )                  |            | $    | 380,000     |             |            | $ | (954,000    | )          |           | $ | (380,000   | )         
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Net (Loss) income Per Common Share (Note 7):                                                |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Basic:                                   |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |          
|                                                                                            |                                          | From Continuing Operations                                 |             | $                  | (0.30      | )    |             | $           | 0.06       |   |             | $          | (0.15     | ) |            | $          | (0.06     | )
|                                                                                            |                                          | Loss from Discontinued Operations                          |             |                    |            |      |             |             | (0.01      | ) |             |            |           |   |            |            |           |  
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          | Net (Loss) Income                                          |             | $                  | (0.30      | )    |             | $           | 0.06       |   |             | $          | (0.15     | ) |            | $          | (0.06     | )
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Diluted:                                 |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |          
|                                                                                            |                                          | From Continuing Operations                                 |             | $                  | (0.30      | )    |             | $           | 0.06       |   |             | $          | (0.15     | ) |            | $          | (0.06     | )
|                                                                                            |                                          | Loss from Discontinued Operations                          |             |                    |            |      |             |             | (0.01      | ) |             |            |           |   |            |            |           |  
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                          | Net (Loss) Income                                          |             | $                  | (0.30      | )    |             | $           | 0.06       |   |             | $          | (0.15     | ) |            | $          | (0.06     | )
|                                                                                            |                                          |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           

See accompanying notes to consolidated financial
statements

3



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |             |            |             |  
|----------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------- | ----------- | ---------- | ---------- | ---------- | ----------- | ---------- | ----------- | -
|                                                                                    |                                                                             |                                                                   
|                                                                                    |                                                                             | Nine Months Ended                                                 
|                                                                                    |                                                                             | March 31,                                                         
|                                                                                    |                                                                             |                                                                   
|                                                                                    |                                                                             | 2003                                                               |                                                         | 2002       
|                                                                                    |                                                                             |                                                                    |                                                         |            
|                                                                                    |                                                                             |                                                                   
|                                                                                    |                                                                             | (Unaudited)                                                       
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                           |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | Net (Loss) income                                                           |                                                                    | $                                                       | (1,926,000  | )          |            | $          | 380,000     |           
|                                                                                    | Less: Loss from discontinued operations                                     |                                                                    |                                                         |            |            |            |            | (42,000     | )         
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | (Loss) Income from continuing operations                                    |                                                                    |                                                         | (1,926,000  | )          |            |            | 422,000     |           
|                                                                                    | Adjustments to derive cash flow from operating
    activities:              |                                                                    |                                                         |             |            |            |            |             |           
|                                                                                    |                                                                             | Provision for bad debts                                            |                                                         |             | 1,201,000  |            |            |             | 1,247,000  |            
|                                                                                    |                                                                             | Depreciation and amortization                                      |                                                         |             | 6,053,000  |            |            |             | 7,030,000  |            
|                                                                                    |                                                                             | Deferred income taxes                                              |                                                         |             | 6,000      |            |            |             | 64,000     |            
|                                                                                    |                                                                             | Deferred rent                                                      |                                                         |             | 100,000    |            |            |             | 442,000    |            
|                                                                                    |                                                                             | Compensation expense related to remeasurement of
    stock options |                                                         |             | 318,000    |            |            |             | 87,000     |            
|                                                                                    |                                                                             | Expense related to amortization of executive
    stock plan        |                                                         |             | 348,000    |            |            |             |           |            
|                                                                                    |                                                                             | Amortization of senior subordinated note discount                  |                                                         |             | 222,000    |            |            |             | 140,000    |            
|                                                                                    |                                                                             | Management compensation paid in preferred stock                    |                                                         |             | 204,000    |            |            |             |           |            
|                                                                                    |                                                                             | Management compensation applied to exercise of
    stock options   |                                                         |             | 174,000    |            |            |             |           |            
|                                                                                    |                                                                             | Loss on retirement/sale of assets                                  |                                                         |             | 22,000     |            |            |             | 71,000     |            
|                                                                                    |                                                                             | Write off of capitalized financing costs                           |                                                         |             | 1,733,000  |            |            |             |           |            
|                                                                                    |                                                                             | Amortization of deferred gain                                      |                                                         |             | (59,000    | )          |            |             | (15,000    | )          
|                                                                                    |                                                                             | Changes in operating assets and liabilities:                       |                                                         |             |            |            |            |             |            |            
|                                                                                    |                                                                             | Trade and other accounts receivable                                |                                                         |             | (8,586,000 | )          |            |             | 3,845,000  |            
|                                                                                    |                                                                             | Inventories                                                        |                                                         |             | (587,000   | )          |            |             | 1,108,000  |            
|                                                                                    |                                                                             | Prepaid expenses and other current assets                          |                                                         |             | 62,000     |            |            |             | (1,798,000 | )          
|                                                                                    |                                                                             | Income taxes receivable                                            |                                                         |             | (2,513,000 | )          |            |             |           |            
|                                                                                    |                                                                             | Accounts payable                                                   |                                                         |             | 5,995,000  |            |            |             | (8,533,000 | )          
|                                                                                    |                                                                             | Accrued expenses and other current liabilities                     |                                                         |             | 382,000    |            |            |             | (2,167,000 | )          
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    |                                                                             |                                                                    | Net cash provided by operating activities               |             |            | 3,149,000  |            |             |            | 1,943,000   |  
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                                           |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | Decrease in restricted cash                                                 |                                                                    |                                                         | 3,780,000   |            |            |            |            |           
|                                                                                    | (Increase) Decrease in other assets                                         |                                                                    |                                                         | (1,073,000  | )          |            |            | 770,000     |           
|                                                                                    | (Increase) Decrease in notes receivables                                    |                                                                    |                                                         | 178,000     |            |            |            | (108,000    | )         
|                                                                                    | Proceeds from sale of property                                              |                                                                    |                                                         | 79,000      |            |            |            | 4,758,000   |           
|                                                                                    | Additions to property, equipment and leaseholds                             |                                                                    |                                                         | (3,996,000  | )          |            |            | (2,905,000  | )         
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    |                                                                             |                                                                    | Net cash (used in) provided by investing
    activities |             |            | (1,032,000 | )          |             |            | 2,515,000   |  
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                           |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | Net reduction of debt instruments                                           |                                                                    |                                                         | (1,961,000  | )          |            |            | (10,436,000 | )         
|                                                                                    | Early retirement of debt                                                    |                                                                    |                                                         | (13,285,000 | )          |            |            |            |           
|                                                                                    | Proceeds from refinancing                                                   |                                                                    |                                                         | 16,923,000  |            |            |            |            |           
|                                                                                    | Capitalization of deferred financing cost                                   |                                                                    |                                                         | (3,351,000  | )          |            |            |            |           
|                                                                                    | Repurchase of common stock                                                  |                                                                    |                                                         | (370,000    | )          |            |            | (313,000    | )         
|                                                                                    | Proceeds from issuance of preferred stock (Note 6)                          |                                                                    |                                                         | 259,000     |            |            |            |            |           
|                                                                                    | Proceeds from exercise of stock options                                     |                                                                    |                                                         | 58,000      |            |            |            | 5,000       |           
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    |                                                                             |                                                                    | Net cash used in financing activities                   |             |            | (1,727,000 | )          |             |            | (10,744,000 | )
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|Effect of exchange rate changes on cash                                             |                                                                             |                                                                    | 32,000                                                  |             |            |            |           |            
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS FROM CONTINUING OPERATIONS |                                                                             |                                                                    | 422,000                                                 |             |            |            | (6,402,000 | )          
|NET CASH PROVIDED BY DISCONTINUED
    OPERATIONS                                    |                                                                             |                                                                    |                                                        |             |            |            | 4,296,000  |            
|CASH AND CASH EQUIVALENTS, beginning of
    period                                  |                                                                             |                                                                    | 5,554,000                                               |             |            |            | 3,886,000  |            
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|CASH AND CASH EQUIVALENTS, end of
    period                                        |                                                                             | $                                                                  | 5,976,000                                               |             |            | $          | 1,780,0000 |            
|                                                                                    |                                                                             |                                                                    |                                                         |             |            |            |            |            
|CASH PAID DURING THE PERIOD:                                                        |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | Interest                                                                    |                                                                    | $                                                       | 3,942,000   |            |            | $          | 4,250,000   |           
|                                                                                    | Income taxes paid                                                           |                                                                    | $                                                       | 5,201,000   |            |            | $          | 470,000     |           
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
    ACTIVITIES:                         |                                                                             |                                                                    |                                                         |             |            |            |            |            
|                                                                                    | Note Receivable from affiliate related to the
    sale of property (Note 9) |                                                                    |                                                         |             |            |            | $          | 1,400,000   |           

See accompanying notes to consolidated financial
statements

4



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

March 31, 2003


(Unaudited)


Note 1  General

Business

Mercury Air Group, Inc. (the
Company), a Delaware Corporation, was organized in
1956 and provides a broad range of services to the aviation
industry through four principal operating units: fixed base
operations, cargo operations, fuel 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 classified as a
discontinued operation (See Note 2).



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

The $24.0 million Senior Subordinated 12%
Note (the Note) contains provisions that provide
incentives to prepay the principal of the Note. If the entire
principal of the Note is not prepaid by December 31, 2003,
the Note Holder will be entitled to stock warrants equivalent to
5% of the Companys outstanding shares of common stock then
outstanding, exercisable for nominal consideration. If the
principal amount of the Note is in excess of $12.0 million
on December 31, 2003, the Note Holder will be entitled to
receive stock warrants equivalent to an additional 5% of the
number of shares of common stock outstanding at that date,
exercisable for nominal consideration, along with an additional
note with a principal amount of $5.0 million. In addition,
beginning January 2004 and continuing through June 2004, the
interest rate will increase by 1% per annum each month up to a
maximum rate of 18%. The Company is assessing various options to
prepay the principal of the Note by December 31, 2003 but
if the Company does not prepay at least $12.0 million in
principal on the Note by December 31, 2003, the
consideration due the Note Holder at that time will adversely
affect the Companys financial position and may have a
negative effect on its ability to meet its financial
obligations. In addition, the issuance and exercise of these
warrants will have a dilutive impact on the current shares of
common stock outstanding.

While the Note is subordinate to the Senior
Secured Credit Facility (the Facility), the loan and
security agreement does allow for the prepayment of principal on
both the Note and the Facility under certain conditions. Under
the terms of loan and security agreement of the Facility, the
first $15.0 million of principal prepayment is to be
applied equally to the outstanding principal of the
Facilitys term loan and the Note. The next
$4.5 million of principal prepayment is to be applied
entirely to the outstanding principal of the Note. The next
principal prepayments will then either be applied equally to the
outstanding principal of the Facility and to the Note or
entirely to the outstanding principal of the Note, depending on
certain conditions, until the entire $24.0 million of the
Note has been repaid in full.

As of March 31, 2003, the Company was in
compliance with all of the covenants contained in the Facility
and the Note; however, based on managements judgement, the
Company may exceed the Facilitys maximum capital
expenditure covenant and the Notes maximum professional
fees covenant for the period ending June 30, 2003. The Company
will be holding discussions with its Lenders to address these
issues and attempt to obtain waivers for these financial
covenants.

5



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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.

The Company has received notice from Los Angeles
World Airports (LAWA) of a proposed rental increase
for the cargo operations warehouse facility at the Los
Angeles International Airport (LAX). The Company has
objected to the proposed increase and intends on continuing to
defend its position that the proposed increase is not justified
given the business environment in which the Company is
operating. The proposed increase, subject to approval by the
Board of Airport Commissioners (the Board), is
expected to be presented at the LAWA Board Meeting in late May
2003. The proposed increase included a retroactive adjustment of
$1.4 million and an additional $2.5 million in rent
over the remaining life of the lease. It is the Companys
understanding that any retroactive adjustment would be applied
prospectively over the remaining life of the lease. The existing
lease expires in June of 2006. The effect of the proposed rent
increase, if approved, will adversely affect the profitability
of the Companys LAX warehousing position.

Basis of
Presentation

The accompanying unaudited financial statements
of the Company have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles in the United States of America
for complete financial statements. In the opinion of management,
all adjustments consisting of normal recurring adjustments and
accruals, as well as accounting changes considered necessary for
a fair presentation have been reflected in these financial
statements. Operating results for the quarter are not
necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2003 due to seasonal and
other factors. In order to maintain consistency and
comparability between periods presented, certain prior period
amounts have been reclassified to conform to the current period
presentation. The accompanying financial statements should be
read in conjunction with the audited consolidated financial
statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended
June 30, 2002.

New
Accounting Pronouncements

In December 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment of FASB
Statement No. 123. This statement amends
SFAS No. 123 Accounting for Stock-Based
Compensation to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in
both the annual and interim

6



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company adopted the
disclosure provisions beginning with the Companys quarter
ended December 31, 2002. The Company has no current
intention to change its policy of accounting for stock-based
compensation.

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 loss and loss per
share would have approximated the pro forma amounts indicated in
the following table:

|                                                  |  |                   |            |                    |  |         |         |         |  |   |            |   |  |   |          |  
|------------------------------------------------- |  | ----------------- | ---------- | ------------------ |  | ------- | ------- | ------- |  | - | ---------- | - |  | - | -------- | -
|                                                  |  |                   |            |                   
|                                                  |  | Nine Months Ended |            | Three Months Ended
|                                                  |  |                   |            |                   
|                                                  |  | 3/31/03           |            | 3/31/02            |  | 3/31/03 |         | 3/31/02
|                                                  |  |                   |            |                    |  |         |         |        
|Net (loss) income  as reported                   |  | $                 | (1,926,000 | )                  |  | $       | 380,000 |         |  | $ | (954,000   | ) |  | $ | (380,000 | )
|Net (loss) income  pro forma                     |  | $                 | (2,114,000 | )                  |  | $       | 215,000 |         |  | $ | (1,018,000 | ) |  | $ | (452,000 | )
|Basic (loss) income per share  as
    reported   |  | $                 | (0.30      | )                  |  | $       | 0.06    |         |  | $ | (0.15      | ) |  | $ | (0.06    | )
|Basic (loss) income per share 
    pro forma     |  | $                 | (0.32      | )                  |  | $       | 0.03    |         |  | $ | (0.15      | ) |  | $ | (0.07    | )
|Diluted (loss) income per share 
    as reported |  | $                 | (0.30      | )                  |  | $       | 0.06    |         |  | $ | (0.15      | ) |  | $ | (0.06    | )
|Diluted (loss) income per share 
    pro forma   |  | $                 | (0.32      | )                  |  | $       | 0.03    |         |  | $ | (0.15      | ) |  | $ | (0.07    | )

The Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets on July 1,
2002. SFAS No. 142 requires that existing and future
goodwill and intangible assets with indefinite lives not be
amortized, but written down, as needed, based upon an impairment
analysis that must occur at least, annually, or sooner if an
event occurs or circumstances change that would more likely than
not result in an impairment loss. All other intangible assets
are amortized over their estimated useful lives.
SFAS No. 142 requires that the Company perform step
one of a two-part transitional impairment test to compare the
reporting units fair value with their respective carrying
amount, including goodwill. If the carrying value exceeds the
fair value, step two of the transitional impairment test must be
performed to measure the amount of the impairment loss, if any.
SFAS No. 142 also requires that intangible assets be
reviewed as of the date of adoption to determine if they
continue to qualify as intangible assets under the criteria
established under SFAS No. 141, Business
Combinations, and to the extent previously recorded
intangible assets do not meet the criteria that they be
reclassified to goodwill.

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

7



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

The following is a reconciliation of reported net
(loss) income adjusted for adoption of
SFAS No. 142:

|                                                         |  |               |            |               |  |               |         |               |  |   |          |   |  |   |          |  
|-------------------------------------------------------- |  | ------------- | ---------- | ------------- |  | ------------- | ------- | ------------- |  | - | -------- | - |  | - | -------- | -
|                                                         |  | Nine Months   |            | Nine Months   |  | Three Months  |         | Three Months 
|                                                         |  | Ended 3/31/03 |            | Ended 3/31/02 |  | Ended 3/31/03 |         | Ended 3/31/02
|                                                         |  |               |            |               |  |               |         |              
|Net (Loss) Income as Reported                            |  | $             | (1,926,000 | )             |  | $             | 380,000 |               |  | $ | (954,000 | ) |  | $ | (380,000 | )
|Goodwill amortization (net of tax)                       |  |               |            |               |  |               | 186,000 |               |  |   |          |   |  |   | 62,000   |  
|                                                         |  |               |            |               |  |               |         |               |  |   |          |   |  |   |          |  
|Net (Loss) Income as adjusted                            |  | $             | (1,926,000 | )             |  | $             | 566,000 |               |  | $ | (954,000 | ) |  | $ | (288,000 | )
|                                                         |  |               |            |               |  |               |         |               |  |   |          |   |  |   |          |  
|Fully diluted (loss) earnings per share, as
    adjusted |  | $             | (0.30      | )             |  | $             | 0.08    |               |  | $ | (0.15    | ) |  | $ | (0.05    | )
|Fully diluted (loss) earning per share, as
    reported  |  | $             | (0.30      | )             |  | $             | 0.06    |               |  | $ | (0.15    | ) |  | $ | (0.06    | )

The Company had $1,108,000 and $233,000 of net
intangible assets at March 31, 2003 and June 30, 2002,
respectively. Accumulated amortization for intangible assets was
$892,000 and $767,000 at March 31, 2003 and June 30,
2002, respectively. Intangible assets at March 31, 2003
consist of covenants not to compete agreements and fuel sales
contracts amortized over 3-5 years. Amortization expense
for intangible assets was $125,000 and $150,000 for the nine
months ended March 31, 2003 and the year ended
June 30, 2002. Estimated amortization expense in each of
the next five years is as follows: $75,000 in the remainder of
2003; $300,000 in 2004; $233,000 in 2005; $200,000 in 2006;
$200,000 in 2007; and $100,000 thereafter.

Included in Property, Equipment and Leaseholds
are leasehold interests relating to the unallocated purchase
costs of certain FBO locations. The capitalized value of these
leasehold interests was $16,257,000 at March 31, 2003 and
June 30, 2002. Accumulated depreciation of the leasehold
interests was $6,214,000 and $5,434,000 at March 31, 2003
and June 30, 2002, respectively. Estimated depreciation
expense in each of the next five years is as follows: $260,000
in the remainder of 2003; $1,041,000 in 2004; $1,011,000 in
2005; $1,001,000 in 2006; $918,000 in 2007: and $5,812,000
thereafter.

Effective June 30, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 143, Accounting for Asset Retirement
Obligations. This Statement establishes accounting
standards for the recognition and measurement of an asset
retirement obligation and associated asset retirement cost. It
also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets.
Adoption of this statement had no impact on the Companys
consolidated results of operations or financial position.

Effective July 1, 2002, the Company adopted
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 component 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
previously required by APB Opinion No. 30). In addition,
more dispositions may qualify for discontinued operations
treatment. The adoption of SFAS No. 144 did not have a
material effect on the Companys consolidated financial
position or results of operations.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements Nos, 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections, which rescinds and amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The Company adopted
SFAS No. 145 on July 1, 2002.

8



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

In July 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. The
Company adopted SFAS No. 146 on January 1, 2003.
The adoption of this statement did not affect the Companys
consolidated financial position or results of operations.

On April 30, 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. Such
standard amends and clarifies the accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this
statement are generally effective for contracts entered into or
modified after June 30, 2003. The Company is in the process
of assessing the impact of adopting this standard on its
consolidated results of operations and financial position.

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

In January 2003, the FASB issued Interpretation
Number 46, Consolidation of Variable Interest
Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business
enterprises of variable interest entities. Under current
practice, two enterprises generally have been included in
consolidated financial statements because one enterprise
controls the other through voting interests. FIN 46 defines
the concept of variable interests and requires
existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among the parties involved. This
interpretation applies immediately to variable interest entities
created after January 31, 2003. It applies in the first
fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. The interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of
the beginning of the first year restated. The Company is
assessing, but at this point does not believe the adoption of
FIN 46 will have a material impact on its financial
position or results of operations.

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. 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. As of June 30, 2002 the Company no longer
retained any significant assets or liabilities related to RPA.

9



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

Note 3  Income Taxes

Income taxes have been computed based on the
estimated annual effective income tax rate for the respective
periods.

Note 4  Litigation

In September 2001, the Company filed a motion for
declaratory judgment to determine its liability as a result of a
fuel spill on April 8, 2001 at the Ontario, CA. Airport. 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 the fuel spill.
The parties have reached a tentative settlement through
mediation. Trial has been continued until October 2003, pending
the outcome of the proposed settlement.

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) did not meet certain
federal regulatory guidelines. Specifically, the Environmental
Protection Agency (EPA) alleged that Mercurys
SPCC failed to provide for proper parking, secondary
containment, and proper drainage of its refueler trucks. Mercury
entered into discussions with the EPA and responded to the NOV.
On January 29, 2003, the EPA again notified the Company of
some deficiencies in its latest SPCC and requested that Mercury
submit a written response to its allegations within
30 days. On March 14, 2003, Mercury received a Notice
of Violation from the United States Environmental Protection
Agency, Region 5 (EPA) alleging certain
deficiencies in the SPCC for its Fort Wayne, Indiana facility,
submitted to EPA in November 2002. Mercury believes that it has
resolved all deficiencies except for alleged deficiencies
related to: 1) secondary containment for refueler trucks,
and 2) secondary containment for discrete fuel loading
areas. Pursuant to an agreement detailed in a letter submitted
to EPA on April 16, 2003, Mercury has been permitted to
suspend modifications to its SPCC regarding the installation of
secondary containment for its refueler trucks, pending
resolution of federal regulatory issues associated with
secondary containment for such trucks. EPA has also extended
national compliance with regulations related to discrete loading
areas until August 17, 2004.

On October 31, 2002 a complaint was filed
before the National Labor Relations Board Region 12 on
behalf of the Transport Workers Union of America,
Local 525, AFL-CIO alleging that Maytag Aircraft
Corporation has been engaging in unfair labor practices as set
forth in the National Labor Relations Act at its Patrick Air
Force Base location. On April 11, 2003, a settlement
agreement was fully executed. The Company agreed to pay
approximately $170,000 plus applicable payroll taxes.

On November 18, 2002, Investorwatch LLC
filed an action in the Superior Court of the State of California
for the County of Los Angeles, Central District alleging
derivative and direct claims against Mercury and certain of its
affiliates based upon alleged wrongful conduct in connection
with certain transactions entered into by Mercury, including
certain related party transactions, which transactions were
previously disclosed by Mercury. On February 18, 2003, the
plaintiff filed a dismissal without prejudice with the court.

On November 27, 2002, Andrew J. Chitiea
filed a shareholder verified derivative complaint in the
Superior Court of the State of California, County of San Diego,
North County Division alleging that certain directors of the
Company breached their fiduciary duty to the Company. On
February 13, 2003, the plaintiff files a dismissal without
prejudice with the court to dismiss the complaint and the entire
action of all parties and causes of action.

On February 26, 2003, Robert Bosch, filed an
action in the United States District Court, Eastern District of
New York against Excel Cargo, Inc. and others, seeking
$1.5 million in damages for damaged cargo. The Company is
in the process of responding to the complaint. Mercury does not
believe the outcome of this claim will have a significant impact
on its financial position or operating results.

10



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

On April 16, 2003, the Plan Committee of
Shuttle America Corp filed a Adversary Proceeding in the United
States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The Company
believes that it has significant defenses in this matter. The
Companys answer is due on May 16, 2003. Mercury does
not believe this matter will have a significant impact on its
financial position or operating results.

The Company is also a defendant in certain
litigation arising in the normal course of business. In the
opinion of management, the ultimate resolution of such
litigation will not have a significant effect on its financial
position or operating results. Reference is made to the SEC
Form 10-Q for the quarterly period ended December 31,
2002 for additional litigation with respect to which no material
developments have occurred in the current quarter.

Note 5  Debt

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

The Facility provides a total of up to
$42.5 million in revolving and term loans. The term loan is
for an amount equal to $12.5 million, while the revolving
loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to
certain limitations. The term loan is payable in
$1.0 million installments each April 1 and
October 1, beginning April 1, 2003 and in
$0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the
term loan increase the maximum availability under the revolving
loan. The Facility also provides for the issuance of certain
letters of credit. The terms of the Facility requires that the
Company maintain a minimum availability on the revolving line of
credit of $2.5 million. As of March 31, 2003, the
Company had $3.8 million of availability on the revolving
line of credit. The amount of the available revolving credit
line fluctuates on a daily basis dependent upon the amount of
Eligible Accounts Receivable and the amount of letters of credit
outstanding and the amount of outstanding cash borrowings
against the revolving credit facility.

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

The revised Whitney Note is in the form of a
$24.0 million Senior Subordinated 12% Note (the
Note) with detachable warrants to purchase 503,126
shares of the Companys common stock exercisable at $3.742
per share through September 9, 2006. The warrant exercise
price was reduced from $5.50 per share. The Note is secured by
the Companys assets, subordinate to Foothills
interest. Warrants to purchase an additional 5% of the
Companys common stock, exercisable for nominal
consideration, will be issued if the principal amount of the
Note is not prepaid by December 31, 2003. Warrants to
purchase a second 5% of the Companys common stock,
exercisable for nominal consideration, along with an additional
note in the original principal amount of $5.0 million, will
also be issued if the outstanding principal amount of the Note
is greater than $12.0 million after December 31, 2003.
In addition, beginning January 2004 and continuing through June
2004, the interest rate will increase by 1% per annum each month
up to a maximum rate of 18%. The Company is currently assessing
various options that will enable it to prepay the principal
portion of the Note to avoid the necessity of having to issue
the additional warrants and incur the additional note
obligation. At such

11



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

time when the Company determines that it is
probable that the Note, or a portion of the Note, will be
prepaid, the estimated amount of the prepayment may be
classified as a current portion of long-term debt on the
Companys balance sheet. Until the Company determines that
it is not probable that the Note, or any portion of the Note,
will be prepaid, the Company is accruing the additional cost of
the new warrants and the additional note obligation over the
remaining term of the Note. The Company is also required to
prepay all outstanding principal of the Note and any additional
note on December 31, 2004, but the failure by the Company
to make such prepayment will not entitle the holder to
accelerate the balance on the outstanding Note or outstanding
additional note. The revised Whitney Note contains similar
covenants as in the original Note, including covenants that,
among other matters, limit senior indebtedness, the payment of
dividends, and the disposition of assets. The revised covenants
also include minimum EBITDA requirements and capital expenditure
limitations.

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

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

At June 30, 2002, the Company was in
noncompliance with certain debt covenants contained in the
previous credit facility, giving the lenders the right to
declare the outstanding obligation immediately due and payable.
As such, the total principal amount outstanding on the previous
Senior Secured Credit Facility and the Note were classified on
the Companys consolidated balance sheet at June 30,
2002 as current portion of long-term debt and Senior
Subordinated Note, current. With the aforementioned refinancing,
the default conditions were removed and the debt is classified
as current and long term based on normal due dates stipulated by
the loan agreement. In addition, for the nine months ended
March 31, 2003 the Company wrote off $1.7 million in
capitalized financing costs relating to the previous credit
facility and Note.

Note 6  Preferred Stock

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

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

12



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

aforesaid amounts, the Preferred Stockholders
would share in the assets ratably in proportion to the full
preferential amount.

Note 7  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 In calculating earnings per
share, the loss for the nine and three month periods was reduced
by accrued preferred stock dividends of $9,000. Diluted earnings
per share is computed by dividing net income less accrued
preferred stock dividends by the weighted average number of
common shares and potential common shares. Potential common
shares include stock options, shares resulting from the assumed
conversion of subordinated debentures, and preferred stock
redemptions, when dilutive.

|                                                                                                 |  |                   |           |                    |  |                |           |                |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|------------------------------------------------------------------------------------------------ |  | ----------------- | --------- | ------------------ |  | -------------- | --------- | -------------- |  | ------- | --------- | ----- |  | ------- | --------- | ----- |  |  | --------- |  |  |  | --------- |  |  |  | --------- |  |  |  | --------- | 
|                                                                                                 |  |                   |           |                   
|                                                                                                 |  | Nine Months Ended |           | Three Months Ended
|                                                                                                 |  |                   |           |                   
|                                                                                                 |  |                   |           |                    |  |                |           |               
|                                                                                                 |  | March 31, 2003    |           | March 31, 2002     |  | March 31, 2003 |           | March 31, 2002
|                                                                                                 |  |                   |           |                    |  |                |           |               
|                                                                                                 |  | Diluted           |           | Basic              |  | Diluted        |           | Basic          |  | Diluted |           | Basic |  | Diluted |           | Basic
|                                                                                                 |  |                   |           |                    |  |                |           |                |  |         |           |       |  |         |           |      
|Weighted average number of common shares
    outstanding during the period                       |  |                   | 6,509,000 |                    |  |                | 6,509,000 |                |  |         | 6,557,000 |       |  |         | 6,557,000 |       |  |  | 6,577,000 |  |  |  | 6,577,000 |  |  |  | 6,518,000 |  |  |  | 6,518,000 | 
|Common share equivalents resulting from the
    assumed exercise of stock options                |  |                   |           |                    |  |                |           |                |  |         | 142,000   |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  | 151,000   |  |  |  |           | 
|Common shares resulting from the assumed
    conversion of debentures                            |  |                   |           |                    |  |                |           |                |  |         | 28,000    |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  | 28,000    |  |  |  |           | 
|                                                                                                 |  |                   |           |                    |  |                |           |                |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|Weighted average number of common and common
    equivalent shares outstanding during the period |  |                   | 6,509,000 |                    |  |                | 6,509,000 |                |  |         | 6,727,000 |       |  |         | 6,557,000 |       |  |  | 6,577,000 |  |  |  | 6,577,000 |  |  |  | 6,697,000 |  |  |  | 6,518,000 | 
|                                                                                                 |  |                   |           |                    |  |                |           |                |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 

Note 8  Segment Reporting

The Company discloses segment information in
accordance with Statements of Financial Accounting Standards
(SFAS) No. 131, Disclosure About Segments
of an Enterprise and Related Information, which requires
companies to report selected segment information on a quarterly
basis and to report certain entity-wide disclosures about
products and services, major customers and material countries in
which the entity holds assets and reports revenues. The
operating segments reported below are the segments of the
Company for which operating results are evaluated regularly by
management in deciding how to allocate resources and in
assessing performance. Intersegment sales are not significant.

The Company operates and reports its activities
through four principal units: 1) Fuel Sales, 2) Fixed
Based Operations, 3) Cargo Operations and
4) Government Contract Services.

|                              |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|----------------------------- |  | ---------------------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------- | 
|                              |  |                        |        |            |  |            |        | Government |  | Corporate   |        |      
|                              |  |                        |        | Fixed Base |  | Cargo      |        | Contract   |  | or          |        |      
|                              |  | Fuel Sales             |        | Operations |  | Operations |        | Services   |  | Unallocated |        | Total
|                              |  |                        |        |            |  |            |        |            |  |             |        |      
|                              |  |                       
|                              |  | (Dollars in Thousands)
|Quarter Ended March 31, 2003  |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                      |  | $                      | 72,497 |            |  | $          | 24,479 |            |  | $           | 8,396  |       |  | $ | 5,990  |  |  | $ | (335   | ) |  | $ | 111,027 | 
|Gross Margin                  |  |                        | 1,670  |            |  |            | 2,870  |            |  |             | 482    |       |  |   | 1,211  |  |  |   |        |   |  |   | 6,233   | 
|Depreciation and Amortization |  |                        | 105    |            |  |            | 1,382  |            |  |             | 453    |       |  |   | 84     |  |  |   | 25     |   |  |   | 2,049   | 
|Capital Expenditures          |  |                        | 1      |            |  |            | 419    |            |  |             | 2      |       |  |   | 4      |  |  |   | 19     |   |  |   | 445     | 
|Segment Assets                |  |                        | 36,157 |            |  |            | 62,391 |            |  |             | 16,099 |       |  |   | 11,962 |  |  |   | 15,400 |   |  |   | 142,009 | 
|Quarter Ended March 31, 2002  |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                      |  | $                      | 52,243 |            |  | $          | 22,491 |            |  | $           | 6,400  |       |  | $ | 6,784  |  |  |   |        |   |  | $ | 87,918  | 
|Gross Margin                  |  |                        | 1,799  |            |  |            | 3,195  |            |  |             | (153   | )     |  |   | 1,674  |  |  |   |        |   |  |   | 6,515   | 
|Depreciation and Amortization |  |                        | 16     |            |  |            | 1,489  |            |  |             | 547    |       |  |   | 171    |  |  | $ | 123    |   |  |   | 2,346   | 
|Capital Expenditures          |  |                        | 11     |            |  |            | 661    |            |  |             | 45     |       |  |   | 5      |  |  |   | 14     |   |  |   | 736     | 
|Segment Assets                |  |                        | 23,206 |            |  |            | 68,169 |            |  |             | 14,866 |       |  |   | 14,306 |  |  |   | 13,706 |   |  |   | 134,253 | 

13



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

|                                     |  |                        |         |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|------------------------------------ |  | ---------------------- | ------- | ---------- |  | ---------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                     |  |                        |         |            |  |            |        | Government |  | Corporate   |        |      
|                                     |  |                        |         | Fixed Base |  | Cargo      |        | Contract   |  | or          |        |      
|                                     |  | Fuel Sales             |         | Operations |  | Operations |        | Services   |  | Unallocated |        | Total
|                                     |  |                        |         |            |  |            |        |            |  |             |        |      
|                                     |  |                       
|                                     |  | (Dollars in Thousands)
|Nine Months Ended March 31,
    2003 |  |                        |         |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                             |  | $                      | 218,111 |            |  | $          | 72,187 |            |  | $           | 24,840 |       |  | $ | 18,510 |  |  | $ | (764   | ) |  | $ | 332,884 | 
|Gross Margin                         |  |                        | 4,741   |            |  |            | 8,784  |            |  |             | 2,416  |       |  |   | 3,360  |  |  |   |        |   |  |   | 19,301  | 
|Depreciation and Amortization        |  |                        | 213     |            |  |            | 3,963  |            |  |             | 1,545  |       |  |   | 265    |  |  |   | 67     |   |  |   | 6,053   | 
|Capital Expenditures                 |  |                        | 7       |            |  |            | 3,597  |            |  |             | 67     |       |  |   | 4      |  |  |   | 321    |   |  |   | 3,996   | 
|Segment Assets                       |  |                        | 36,157  |            |  |            | 62,391 |            |  |             | 16,099 |       |  |   | 11,962 |  |  |   | 15,400 |   |  |   | 142,009 | 
|Nine Months Ended March 31,
    2002 |  |                        |         |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                             |  | $                      | 171,353 |            |  | $          | 69,575 |            |  | $           | 21,086 |       |  | $ | 21,747 |  |  |   |        |   |  | $ | 283,761 | 
|Gross Margin                         |  |                        | 5,169   |            |  |            | 10,455 |            |  |             | 1,008  |       |  |   | 5,411  |  |  |   |        |   |  |   | 22,043  | 
|Depreciation and Amortization        |  |                        | 31      |            |  |            | 4,301  |            |  |             | 1,680  |       |  |   | 384    |  |  | $ | 634    |   |  |   | 7,030   | 
|Capital Expenditures                 |  |                        | 22      |            |  |            | 2,718  |            |  |             | 142    |       |  |   | 5      |  |  |   | 18     |   |  |   | 2,905   | 
|Segment Assets                       |  |                        | 23,202  |            |  |            | 68,169 |            |  |             | 14,866 |       |  |   | 14,306 |  |  |   | 13,706 |   |  |   | 134,253 | 

The Companys assets are reviewed by
management on a consolidated basis because it is not meaningful
to allocate assets to the various segments. The Company
evaluates segment performance based on revenues and operating
profits. The Company does not allocate income taxes or charges
determined to be non-recurring in nature, such as restructuring
and impairment charges. Unallocated amounts of operating profits
consist of corporate expenses, and certain general and
administrative expenses from field operations.

The revenue amount for the corporate or
unallocated segment represents the elimination of intersegment
sales between the fuel sales and fixed base operations segments.

Gross margin is used as the measure of profit and
loss for segment reporting purposes as it is viewed by key
decision makers as the principal operating indicator in
measuring segment profitability. The key decision makers also
view bad debt expense as an important measure of profit and
loss. The predominant component of bad debt expense relates to
Fuel Sales. Bad debt expense for Fuel Sales was approximately
$348,000 and $449,000; total bad debt expense was $442,000 and
$475,000 for the quarter ended March 31, 2003 and
March 31, 2002, respectively. Bad debt expense for Fuel
Sales was approximately $980,000 and $1,021,000; total bad debt
expense was $1,201,000 and $1,247,000 for the nine months ended
March 31, 2003 and March 31, 2002, respectively.

Note 9  Comprehensive
Income

Comprehensive (loss) income is summarized as
follows:

|                                        |  |                   |            |                    |  |      |          |      |  |   |          |   |  |   |          |  
|--------------------------------------- |  | ----------------- | ---------- | ------------------ |  | ---- | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                        |  |                   |            |                   
|                                        |  | Nine Months Ended |            | Three Months Ended
|                                        |  | March 31,         |            | March 31,         
|                                        |  |                   |            |                   
|                                        |  | 2003              |            | 2002               |  | 2003 |          | 2002
|                                        |  |                   |            |                    |  |      |          |     
|Net (Loss) Income                       |  | $                 | (1,926,000 | )                  |  | $    | 380,000  |      |  | $ | (954,000 | ) |  | $ | (380,000 | )
|Foreign Currency Translation Adjustment |  |                   | (57,000    | )                  |  |      | (116,000 | )    |  |   | (12,000  | ) |  |   | (116,000 | )
|                                        |  |                   |            |                    |  |      |          |      |  |   |          |   |  |   |          |  
|Comprehensive (Loss) Income             |  | $                 | (1,983,000 | )                  |  | $    | 264,000  |      |  | $ | (966,000 | ) |  | $ | (496,000 | )
|                                        |  |                   |            |                    |  |      |          |      |  |   |          |   |  |   |          |  

Note 10  Related Party
Transactions

CFK Partners, LLC 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, LLC
also owns approximately 30% of the Companys outstanding
common stock.

In January 2002, the Company sold the land and
the office building which houses its corporate headquarters to
CFK Partners, LLC for $4,200,000, consisting of $2,800,000 cash
and a note receivable of

14



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

$1,400,000. The note accrues interest at 5% and
contains provisions whereby CFK Partners, LLC can elect to
extend the maturity date in one year increments through
December 31, 2004. The note had an original maturity date
of December 31, 2002. In early December 2002, the Company
received notification from CFK Partners, LLC that it was
exercising its right to extend the maturity date of the note for
an additional one year period. For the nine-month period
ended March 31, 2003, the Company has expended $275,000 for
leasehold improvements on its corporate headquarters. This
amount will be amortized over the office lease term.

The Company and its Chairman (the
Members) each own a 50% interest in MercMed, LLC
(MercMed). MercMed was formed to own and operate a
corporate aircraft. In early April 2002, the Members agreed to
sell the aircraft. As part of this decision, the Members also
agreed that the Company would fund the monthly partner
contributions to allow MercMed to meet its monthly financial
requirements as detailed in the Operating Agreement and that the
Company would be reimbursed for the amount of contributions
above its proportional share with the net proceeds, after
repayment of the outstanding note, from the sale of the
aircraft. From the period of April 1, 2002 through
March 31, 2003 the Company has contributed $369,000 to
MercMed to meet its financial obligations. These contributions
will be reflected in the Companys Capital Account and will
be collected upon the sale of the aircraft. On March 27,
2003, MercMed secured new financing for the aircraft with a
15-year note with the effective interest rate being fixed for a
36-month period. At the end of the initial 36-month period until
maturity, the interest rate will be reviewed and fixed at the
then Federal Home Loan Banks regular three-year interest
rate plus 275 basis points. Both the Company and its Chairman
are guarantors of this note. As of March 31, 2003, the
principal amount of the note outstanding was $703,000.

The Company uses the services of the legal firm
McBreen and Kopko (the Firm) for various general
corporate legal matters. Mr. Frederick H.
Kopko, Jr., a partner of the Firm, is a member of the
Companys Board of Directors and is a partner with CFK
Partners, LLC. For the three and nine-month periods ended
March 31, 2003, the Company paid the Firm $179,000 and
$541,000, respectively, for legal services rendered.

15



---



##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

Results of Operations Comparison of the Three and Nine Month
Periods Ended March 31, 2003 and March 31, 2002.

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

|                             |  |                             |       |                              |  |        |       |          |  |        |       |          |  |        |       |          |  |   |       |   |  |  |       |   |  |   |      |  |  |  |        | 
|---------------------------- |  | --------------------------- | ----- | ---------------------------- |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | - | ----- | - |  |  | ----- | - |  | - | ---- |  |  |  | ------ | 
|                             |  |                             |       |                             
|                             |  | Nine Months Ended March 31, |       | Three Months Ended March 31,
|                             |  |                             |       |                             
|                             |  |                             |       |                              |  |        |       |         
|                             |  | 2003                        |       | 2002                         |  | 2003   |       | 2002    
|                             |  |                             |       |                              |  |        |       |         
|                             |  |                             |       | % of                         |  |        |       | % of     |  |        |       | % of     |  |        |       | % of    
|                             |  |                             |       | Total                        |  |        |       | Total    |  |        |       | Total    |  |        |       | Total   
|                             |  | Amount                      |       | Revenues                     |  | Amount |       | Revenues |  | Amount |       | Revenues |  | Amount |       | Revenues
|                             |  |                             |       |                              |  |        |       |          |  |        |       |          |  |        |       |         
|                             |  |                            
|                             |  | ($ in millions)            
|Revenues:                    |  |                             |       |                              |  |        |       |          |  |        |       |          |  |        |       |          |  |   |       |   |  |  |       |   |  |   |      |  |  |  |        | 
|Fuel sales                   |  | $                           | 218.1 |                              |  |        | 65.5  | %        |  | $      | 171.4 |          |  |        | 60.4  | %        |  | $ | 72.5  |   |  |  | 65.3  | % |  | $ | 52.2 |  |  |  | 59.4%  | 
|FBOs                         |  |                             | 72.2  |                              |  |        | 21.7  |          |  |        | 69.6  |          |  |        | 24.5  |          |  |   | 24.4  |   |  |  | 22.0  |   |  |   | 22.5 |  |  |  | 25.6   | 
|Cargo operations             |  |                             | 24.8  |                              |  |        | 7.5   |          |  |        | 21.1  |          |  |        | 7.4   |          |  |   | 8.4   |   |  |  | 7.6   |   |  |   | 6.4  |  |  |  | 7.3    | 
|Government contract services |  |                             | 18.5  |                              |  |        | 5.5   |          |  |        | 21.7  |          |  |        | 7.7   |          |  |   | 6.0   |   |  |  | 5.4   |   |  |   | 6.8  |  |  |  | 7.7    | 
|Intercompany Eliminations(2) |  |                             | (0.7  | )                            |  |        | (0.2  | )        |  |        |      |          |  |        |      |          |  |   | (0.3  | ) |  |  | (0.3  | ) |  |   |     |  |  |  |       | 
|                             |  |                             |       |                              |  |        |       |          |  |        |       |          |  |        |       |          |  |   |       |   |  |  |       |   |  |   |      |  |  |  |        | 
|Total Revenue                |  | $                           | 332.9 |                              |  |        | 100.0 | %        |  | $      | 283.8 |          |  |        | 100.0 | %        |  | $ | 111.0 |   |  |  | 100.0 | % |  | $ | 87.9 |  |  |  | 100.0% | 
|                             |  |                             |       |                              |  |        |       |          |  |        |       |          |  |        |       |          |  |   |       |   |  |  |       |   |  |   |      |  |  |  |        | 

|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |      |   |  |  |      |  
|---------------------------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | - | --- |  |  |  | ---- | - |  | - | ---- | - |  |  | ---- | -
|                             |  |        |      | % of     |  |        |      | % of     |  |        |      | % of     |  |        |      | % of    
|                             |  |        |      | Unit     |  |        |      | Unit     |  |        |      | Unit     |  |        |      | Unit    
|                             |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |         
|Gross Margin(1):             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |      |   |  |  |      |  
|Fuel sales                   |  | $      | 4.7  |          |  |        | 2.2  | %        |  | $      | 5.2  |          |  |        | 3.0  | %        |  | $ | 1.7 |  |  |  | 2.3  | % |  | $ | 1.8  |   |  |  | 3.5  | %
|FBOs                         |  |        | 8.8  |          |  |        | 12.2 |          |  |        | 10.4 |          |  |        | 15.3 |          |  |   | 2.9 |  |  |  | 11.7 |   |  |   | 3.2  |   |  |  | 14.2 |  
|Cargo operations             |  |        | 2.4  |          |  |        | 9.7  |          |  |        | 1.0  |          |  |        | 4.8  |          |  |   | 0.5 |  |  |  | 5.7  |   |  |   | (0.2 | ) |  |  | (2.4 | )
|Government contract services |  |        | 3.4  |          |  |        | 18.2 |          |  |        | 5.4  |          |  |        | 24.9 |          |  |   | 1.2 |  |  |  | 20.2 |   |  |   | 1.7  |   |  |  | 24.7 |  
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |      |   |  |  |      |  
|Total Gross Margin           |  | $      | 19.3 |          |  |        | 5.8  | %        |  | $      | 22.0 |          |  |        | 7.8  | %        |  | $ | 6.2 |  |  |  | 5.6  | % |  | $ | 16.5 |   |  |  | 7.4  | %
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |      |   |  |  |      |  

|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|------------------------------------------------------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | - | ---- | - |  |  | ---- | -- |  |  | ----- | - |  |  | ---- | --
|                                                        |  |        |      | % of     |  |        |      | % of     |  |        |      | % of     |  |        |      | % of    
|                                                        |  |        |      | Total    |  |        |      | Total    |  |        |      | Total    |  |        |      | Total   
|                                                        |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |         
|Selling, general and administrative                     |  | $      | 8.2  |          |  |        | 2.5  | %        |  | $      | 7.8  |          |  |        | 2.8  | %        |  | $ | 2.7  |   |  |  | 2.5  | %  |  |  | $3.0  |   |  |  | 3.4% |   
|Provision for bad debts                                 |  |        | 1.2  |          |  |        | 0.4  |          |  |        | 1.2  |          |  |        | 0.4  |          |  |   | 0.4  |   |  |  | 0.4  |    |  |  | 0.5   |   |  |  | 0.5  |   
|Depreciation and amortization                           |  |        | 6.1  |          |  |        | 1.8  |          |  |        | 7.0  |          |  |        | 2.5  |          |  |   | 2.0  |   |  |  | 1.8  |    |  |  | 2.3   |   |  |  | 2.7  |   
|Interest expense and other                              |  |        | 5.2  |          |  |        | 1.5  |          |  |        | 4.3  |          |  |        | 1.5  |          |  |   | 2.5  |   |  |  | 2.2  |    |  |  | 1.3   |   |  |  | 1.5  |   
|Cost and expenses of stock offering                     |  |        |      |          |  |        |      |          |  |        | 1.0  |          |  |        | 0.4  |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|Write off of capitalized financing costs                |  |        | 1.8  |          |  |        | 0.5  |          |  |        |     |          |  |        |     |          |  |   | 0.0  |   |  |  | 0.0  |    |  |  |      |   |  |  |     |   
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|Income (loss) before income taxes                       |  |        | (3.2 | )        |  |        | (0.9 | )        |  |        | 0.7  |          |  |        | 0.2  |          |  |   | (1.5 | ) |  |  | (1.4 | )  |  |  | (0.6  | ) |  |  | (0.7 | ) 
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|Provision for income taxes                              |  |        | (1.2 | )        |  |        | (0.4 | )        |  |        | 0.3  |          |  |        | 0.1  |          |  |   | (0.6 | ) |  |  | (0.5 | )  |  |  | (0.2  | ) |  |  | (0.3 | ) 
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|Income (loss) from continuing operations
    before tax |  |        | (1.9 | )        |  |        | (0.6 | )        |  |        | 0.4  |          |  |        | 0.2  |          |  |   | (0.9 | ) |  |  | (0.9 | )  |  |  | (0.4  | ) |  |  | (0.4 | ) 
|Loss from discontinued operations                       |  |        |     |          |  |        |     |          |  |        | (0.1 | )        |  |        | (0.0 | )        |  |   |     |   |  |  |     |    |  |  |      |   |  |  |     |   
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   
|Net (Loss) Income                                       |  | $      | (1.9 | )        |  |        | (0.6 | )%       |  | $      | 0.4  |          |  |        | 0.1  | %        |  | $ | (0.9 | ) |  |  | (0.9 | )% |  |  | $(0.4 | ) |  |  | (0.4 | )%
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |  |       |   |  |  |      |   



---



|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross margin as used here and throughout
    Managements Discussion excludes depreciation and
    amortization and selling, general and administrative expense.
|   
|(2) | Intercompany eliminations represent sales between
    the fuel sales division and the FBO division.                                                             

16



---



##### Table of Contents



Three Months ended March 31, 2003
compared to the Three Months ended March 31,
2002

Revenue in the third quarter of fiscal year 2003
was $111.0 million, representing an increase of 26.2% from
the revenue reported for the third quarter of fiscal year 2002
of $87.9 million. The increase in revenue is primarily
attributed to a combination of higher average sale prices for
petroleum products in the current quarter and improved
performance by the Companys cargo operations. In addition,
revenue in the amount of $2.0 million is reflected in the
third quarter of fiscal year 2002 from the Companys FBO in
Bedford, Massachusetts (the Bedford FBO) which was
sold in June 2002. The gross margin in the current quarter was
$6.2 million, a decrease of $0.3 million or 4.6% from the
gross margin of $6.5 million reported last year which
included $0.6 million from the Companys Bedford FBO.
Excluding the Bedford FBO margin from last years results,
gross margin increased $0.3 million or 4.6%. The increase
in gross margin was primarily the result of improved margins at
the Companys FBO operations, higher margins in the Cargo
operation, and offset by lower margins in the Government
Contract Services business.

Revenue from the Fuel Sales business represented
65.3% of total revenue in the current period as compared to
59.4% of revenue a year ago. Fuel Sales revenue totaled
$72.5 million in the current period, an increase of 38.8%
from the same period last year, on volume of 63.3 million
gallons. This compares favorably to revenue during the third
quarter of fiscal 2002 of $52.2 million on sales volume of
70.1 million gallons. The increase in sales revenue is
attributed to higher average sales prices for petroleum
products. The current quarter was negatively impacted by reduced
volume resulting from the cessation of business by National
Airlines, Inc. (National) effective November 6,
2002. Excluding the impact of National, third quarter 2002 sales
were $41.8 million on a volume of 53.8 million
gallons. Gross margin from fuel sales was $1.7 million in the
current period, a decrease of 7.2% from last years gross
margin of $1.8 million. The average sales price for fuel in
the current period was 114.3 cents per gallon, an increase of
39.9 cents per gallon from the average price of 74.4 cents per
gallon last year while the average cost of fuel rose 39.0 cents
per gallon to 109.9 cents per gallon as compared to 70.9 cents
per gallon last year. There were many factors that contributed
to the sharp increase in the cost of fuel, including
uncertainties associated with war with Iraq and the effect the
war would have on oil supplies and the oil workers strike
in Venezuela that temporarily halted oil production in that
country leading to a temporary decline in oil supply to the
United States. Since the end of the quarter, fuel costs have
declined from the high point incurred during the most recent
quarter as the war in Iraq winds down without resulting in an
oil supply disruption and the oil workers strike in
Venezuela has ended with that countrys oil production and
exports returned to their more normal levels.

National, a customer of the Companys
MercFuel, Inc. (MercFuel) subsidiary, ceased
operations on November 6, 2002. The Company had been
providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the
Company continued to sell fuel to National on a secured basis
under the auspices of the bankruptcy court. Sales to National
during the third quarter of fiscal year 2002 were
$10.4 million or 19.9% of third quarter revenue for fiscal
2002.

Revenue from the FBO business segment for the
third quarter of fiscal year 2003 was $24.4 million on
sales volume of 8.0 million gallons. This compares to
revenue of $22.5 million on sales volume of
8.0 million gallons last year. Excluding the contribution
of the Bedford FBO from last years results, revenue
increased $3.9 million or 19.0% with a 10.5% increase in
sales volume. The increase in revenue, after adjusting last
years results to exclude the Bedford FBO, was primarily
due to higher average sales price of aviation fuel. The
FBOs gross margin was $2.9 million in the current
period as compared to $3.2 million last year, which included
$0.6 million from the Bedford FBO. The gross margin
adjusted for the effects of the Bedford FBO improved 8.7% from
the prior year.

The Cargo business segment had revenue of
$8.4 million in the third quarter of fiscal year 2003, an
increase of $2.0 million, or 31.2%, from last years
revenue of $6.4 million. The increase in revenue is
primarily attributed to higher import and export activity in the
cargo handling operation. Gross margin from the Cargo business
segment in the current period was $0.5 million, an increase
of $0.7 million from last years results, primarily
due to higher margins in the cargo handling operations partially
offset by higher start-up expenses for the Mercury World Cargo
operations.

17



---



##### Table of Contents



Revenue from the Government Contract Services
segment was $6.0 million, a decrease of $0.8 million,
or 11.7%, from last years third quarter revenue of
$6.8 million. The decline in revenue is primarily due to
the loss of two refueling contracts. Gross margin for the second
quarter of fiscal year 2003 was $1.2 million, a decrease of
$0.5 million from last years gross margin of
$1.7 million. The decrease in gross margin is primarily
attributed to reduced margin on the base operations services
contracts.

Selling, general and administrative expenses in
the third quarter were $2.7 million a decrease of 9.4% from
expenses of $3.0 million in 2002, due to impact of
severance related expenses paid in the third quarter of fiscal
2002.

Provision for bad debts of $0.4 million
decreased slightly from the prior years provision of
$0.5 million.

Depreciation and amortization expense was
$2.0 million in the current period as compared to
$2.3 million last year. The reduction is primarily due to
the sale of the Bedford FBO in June 2002. The current period
reduction also reflects the non-amortization of goodwill for
fiscal year 2003 which resulted in a $0.1 million decrease
from the three months ended March 31, 2002.

Interest expense and other in the current period
was $2.5 million, an increase of $1.2 million or 93%
from interest of $1.3 million in the third quarter of 2002.
The increase is due primarily to the accrual of a premium
relating to the subordinated note, which would be realized in
the event the note is not prepaid in full prior to
December 31, 2003.

Income tax benefit approximated 39% of pre-tax
loss for both periods reflecting the expected effective annual
tax rate.

Nine Months ended March 31, 2003
compared to Nine Months ended March 31, 2002

Revenue for the first nine months of fiscal year
2003 was $332.9 million, representing an increase of 17.3%
from the revenue reported for the same period a year ago of
$283.8 million. The increase in revenue is primarily
attributed to higher average sale prices for petroleum products
and due to the adverse effect last year of the tragic events of
September 11, 2001. Gross margin in the current period was
$19.3 million, a decrease of $2.7 million or 12.4%
from the gross margin of $22.0 million reported last year.
The decline in gross margin was primarily the result of the sale
of the Bedford FBO in June 2002 and lower margins in the
Government Contract Services business partially offset by higher
margins in the Cargo operations.

Revenue from the Fuel Sales business represented
65.5% of total revenue in the current period as compared to
60.4% of revenue a year ago. Fuel sales revenue totaled
$218.1 million in the current period, an increase of 27.3%
from the same period last year, on volume of 221.5 million
gallons. This compares favorably to revenue during the first
nine months of fiscal year 2002, of $171.4 million on a
sales volume of 213.3 million gallons. The increase in
sales revenue and volume is attributed to higher average sales
prices for petroleum products during the current year and the
adverse effect on last years sales volume due to
September 11, 2001. Gross margin from fuel sales was
$4.7 million in the current period, down 8.2% from last
years gross margin of $5.2 million. The average sales
price for fuel in the current period was 98.4 cents per
gallon, an increase of 18.3 cents per gallon from the
average price of 80.1 cents per gallon last year while the
average cost of fuel rose 18.1 cents per gallon to
94.6 cents per gallon as compared to 76.5 cents per
gallon last year. There were many factors that contributed to
the sharp increase in the cost of fuel, including uncertainties
associated with war with Iraq and the effect the war would have
on oil supplies and the oil workers strike in Venezuela
that temporarily halted oil production in that country leading
to a temporary decline in oil supply to the United States. Since
the end of the quarter, fuel costs have declined from the high
point incurred during the most recent quarter as the war in Iraq
winds down without resulting in an oil supply disruption and the
oil workers strike in Venezuela has ended with that
countrys oil production and exports

National, a customer of the Companys
MercFuel, Inc. (MercFuel) subsidiary, ceased
operations on November 6, 2002. The Company had been
providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the
Company continued to sell fuel to National on a secured basis
under the auspices of the bankruptcy court. Sales to National
for the first nine months of fiscal year 2003 were
$24.7 million on a volume of 29.0 million gallons as
compared to $35.5 million on a volume of

18



---



##### Table of Contents



49.9 million gallons for the first nine
months of 2002. As a result of the secured nature of the
transactions, the amount of loss on the cessation of business
was negligible. Excluding the sales volume to National for both
periods, the Fuels Sales businesss sales volume was
192.5 million gallons for the first nine months of fiscal
year 2003 as compared to 163.4 million gallons for the same
period last year.


Revenue from the FBO business segment for the
first nine months of fiscal year 2003 was $72.2 million on
a sales volume of 25.0 million gallons. This compares to
revenue of $69.6 million on a sales volume of
26.3 million gallons last year. Excluding the contribution
of the Bedford FBO from last years results, revenue
increased $7.9 million or 12.3% with essentially no change
in sales volume. The increase in revenue, after adjusting last
years results to exclude the Bedford FBO, was primarily
due to higher average sales price of aviation fuel. The
FBOs gross margin was $8.8 million in the current
period as compared to $10.4 million last year, which
included $1.3 million from the Bedford FBO. Excluding the
margin contribution from the Bedford FBO from last years
results, gross margin for the FBO business segment decreased
$0.3 million, or 3.4%, from last year primarily due to
higher insurance costs.

The Cargo business segment had revenue of
$24.8 million during the first nine months of fiscal year
2003, an increase of $3.7 million, or 17.8%, from last
years revenue of $21.1 million. The increase in
revenue is primarily attributed to higher revenue in the cargo
handling operation, which had increased handling volume due to
the West Coast dockworkers strike and due to improved
import/export activity. Gross margin from the Cargo business
segment in the current period was $2.4 million, an increase
of $1.4 million from last years results, primarily
due to the subleasing of the Cargo businesss Atlanta
warehouse facility to Lufthansa Handling starting in March 2002
and higher margins at its Los Angeles warehouse operations
partially offset by higher start-up expenses for the Mercury
World Cargo operations and lower margins in the Cargo Management
operations.

Revenue from the government contract services
segment was $18.5 million, a decrease of $3.2 million,
or 14.8%, from last years revenue of $21.7 million.
The decline in revenue is primarily due to the loss of the
Yokota, Japan contract, which expired in September 2001 and two
refueling contracts. The Yokota contract provided
$1.4 million, or 6.5%, of the government contract services
segment revenue during the first nine months of fiscal year
2002. Gross margin for the first nine months of fiscal year 2003
was $3.4 million, a decrease of $2.0 million from last
years gross margin of $5.4 million. The decrease in
gross margin is primarily attributed to the loss of the Yokota,
Japan contract, lower margin on the Kuwait Air Terminal contract
and a reserve for a legal settlement of $0.3 million in
fiscal year 2003.

The Companys selling, general and
administrative expenses for the current period were
$8.2 million, an increase of $0.4 from last years
expense of $7.8 million. The increased expense was
primarily due to expenses associated with the extension of
certain stock options and the establishment of an environmental
reserve of $0.3 million for a previously sold site.

Provision for bad debts of $1.2 million is
essentially unchanged from last year.

Depreciation and amortization expense was
$6.1 million in the current period as compared to
$7.0 million last year. The reduction is primarily due to
the sale of corporate headquarters in January 2002 and the sale
of the Bedford FBO in June 2002. The current period also
reflects the non-amortization of goodwill for fiscal year 2003
which resulted in a $0.3 million decrease in amortization
from the prior year.

Interest expense and other in the current period
was $5.2 million, an increase of $0.9 million from
last years interest expense of $4.3 million. The
increase is due primarily to the accrual of a premium relating
to the subordinated note, which would be realized in the event
the note is not paid down prior to December 31, 2003.

As a result of the restructuring of the
Companys long term debt in the current period, the Company
wrote off capitalized financing costs of $1.7 million. This
is comprised of the unamortized portion of the deferred debt
issuance costs associated with the previous senior secured
credit facility and the subordinated note at the time of early
debt extinguishment and note amendment and expenses incurred
associated with other refinancing options that were not
completed.

19



---



##### Table of Contents



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

Income tax (benefit) expense approximated 39% of
pre-tax (loss) income for both periods reflecting the expected
effective annual tax rate.

Liquidity and Capital Resources:

As of March 31, 2003, the Companys
cash and cash equivalents were $6.0 million, an increase of
$0.4 million for the nine month period then ended. Cash
generated from operating activities for the nine month period
ended March 31, 2003 was $3.1 million comprised of
cash generated of $8.4 million from earnings, adjusted for
non-cash items, less $5.3 million for an increase in net
working capital. The increase in working capital was primarily
due to an increase in Mercfuels trade receivables from
higher petroleum prices and a reduction in the current income
tax liability.

During the first nine months of fiscal year 2003,
the Company used $1.0 million in investing activities. The
company made additions of $3.9 million to property, plant
and equipment primarily for hangar and tank farm projects for
the fixed base operations. In addition, the Company used
$1.0 million for the purchase of fuel sales contracts for
the fuel sales division. These outlays were offset by a decrease
in restricted cash of $3.8 million generated by the sale of
the Bedford FBO and used to reduce long-term debt.

The Companys financing activities used
$1.7 million in cash primarily due to a net draw down on
the revolving credit facility. In addition the Company generated
$0.3 million and $0.1 million from the issuance of
preferred stock and exercise of stock options, respectively. The
issuance of the preferred stock occurred after the Company was
unable to draw-down on the previous revolving credit facility.

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

The Facility provides a total of up to
$42.5 million in revolving and term loans. The term loan is
for an amount equal to $12.5 million, while the revolving
loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to
certain limitations. The term loan is payable in
$1.0 million installments each April 1 and
October 1, beginning April 1, 2003 and in
$0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the
term loan increase the maximum availability under the revolving
loan. The Facility also provides for the issuance of certain
letters of credit. The terms of the Facility requires that the
Company maintain a minimum availability on the revolving line of
credit of $2.5 million. As of March 31, 2003, the
Company had $3.8 million of availability on the revolving
line of credit. The amount of available revolving credit line
fluctuates on a daily basis dependent upon the amount of
Eligible Receivables and the amount of letters of credit
outstanding and the amount of outstanding cash borrowings
against the revolving credit facility.

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

The revised Whitney Note is in the form of a
$24.0 million Senior Subordinated 12% Note (the
Note) with detachable warrants to purchase
503,126 shares of the Companys common stock
exercisable at $3.742 per share through September 9, 2006.
The warrant exercise price was reduced from $5.50 per share. The
Note is secured by the Companys assets, subordinate to
Foothills interest. Warrants to purchase an additional 5%

20



---



##### Table of Contents



of the Companys common stock, exercisable
for nominal consideration, will be issued if the principal
amount of the Note is not prepaid by December 31, 2003.
Warrants to purchase a second 5% of the Companys common
stock, exercisable for nominal consideration, along with an
additional note in the original principal amount of $5,000,000,
will also be issued if the outstanding principal amount of the
Note is greater than $12,000,000 after December 31, 2003.
In addition, beginning January 2004 and continuing through June
2004, the interest rate will increase by 1% per annum each month
up to a maximum rate of 18%. The Company is currently assessing
various options that will enable it to prepay the principal
portion of the Note to avoid the necessity of having to issue
the additional warrants and incur the additional note
obligation. At such time when the Company determines that it is
probable that the Note, or a portion of the Note, will be
prepaid, the estimated amount of the prepayment may be
classified as a current portion of long term debt on the
Companys balance sheet. Until the Company determines that
it is not probable that the Note, or any portion of the Note,
will be prepaid, the Company is accruing the additional cost of
the new warrants and the additional note obligation over the
remaining term of the Note. The Company is also required to
prepay all outstanding principal of the Note and any additional
note on December 31, 2004, but the failure by the Company
to make such prepayment will not entitle the holder to
accelerate the balance on the outstanding Note or outstanding
additional note. The revised Whitney facility contains similar
covenants as in the original Note, including covenants that,
among other matters, limit senior indebtedness, the payment of
dividends, and the disposition of assets. The revised covenants
also include minimum EBITDA requirements and capital expenditure
limitations.


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

As of March 31, 2003, the Company was in
compliance with all of the covenants contained in the Facility
and the Note; however, based on managements judgement, the
Company may exceed the Facilitys maximum capital
expenditure covenant and the Notes maximum professional
fees covenant for the period ending June 30, 2003. The Company
will be holding discussions with its Lenders to address these
issues and attempt to obtain waivers for these financial
covenants.

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

Critical Accounting Policies

Managements beliefs regarding significant
accounting policies have not changed significantly from those
discussed in Item 7 of the Companys Annual Report on
Form 10-K for the year ended June 30, 2002.






|        |                                                              
|------- | -------------------------------------------------------------
|Item 3. | 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
affected 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 March 31, 2003 by expected
maturity dates. Weighted average variable rates are based on
rates in effect at March 31, 2003. These rates should not
be considered a predictor of actual future interest rates.

21



---



##### Table of Contents



Expected Maturity Date

|                                  |  |         |           |         |  |         |           |         |  |         |           |            |  |       |            |            |  |   |           |   |  |   |            |   |  |   |            |   |  |   |            | 
|--------------------------------- |  | ------- | --------- | ------- |  | ------- | --------- | ------- |  | ------- | --------- | ---------- |  | ----- | ---------- | ---------- |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | 
|                                  |  | June-03 |           | June-04 |  | June-05 |           | June-06 |  | June-07 |           | Thereafter |  | Total |            | Fair Value
|                                  |  |         |           |         |  |         |           |         |  |         |           |            |  |       |            |           
|Fixed Rate Subordinated Note      |  |         | 0         |         |  |         | 0         |         |  |         | 0         |            |  | $     | 23,401,000 |            |  |   | 0         |   |  |   | 0          |   |  | $ | 23,401,000 |   |  | $ | 24,000,000 | 
|Average Interest Rate(3)          |  |         | 29.3      | %       |  |         | 29.3      | %       |  |         | 29.3      | %          |  |       | 29.3       | %          |  |   | 0         |   |  |   | 0          |   |  |   | 29.3       | % |  |   |            | 
|Fixed Rate Other Debt             |  | $       | 122,000   |         |  | $       | 26,000    |         |  | $       | 26,000    |            |  | $     | 26,000     |            |  | $ | 26,000    |   |  | $ | 143,000    |   |  | $ | 369,000    |   |  | $ | 369,000    | 
|Average Interest Rate             |  |         | 8.50      | %       |  |         | 8.58      | %       |  |         | 9.14      | %          |  |       | 9.14       | %          |  |   | 9.14      | % |  |   | 9.14       | % |  |   | 8.80       | % |  |   |            | 
|Variable Rate Tax Exempt Bonds(1) |  | $       | 500,000   |         |  | $       | 1,000,000 |         |  | $       | 1,000,000 |            |  | $     | 1,000,000  |            |  | $ | 1,000,000 |   |  | $ | 10,000,000 |   |  | $ | 14,500,000 |   |  | $ | 14,500,000 | 
|Average Interest Rate             |  |         | 1.61      | %       |  |         | 1.61      | %       |  |         | 1.61      | %          |  |       | 1.61       | %          |  |   | 1.61      | % |  |   | 1.61       | % |  |   | 1.61       | % |  |   |            | 
|Variable Rate Other Debt(2)       |  | $       | 1,000,000 |         |  | $       | 3,000,000 |         |  | $       | 3,000,000 |            |  | $     | 3,000,000  |            |  | $ | 2,500,000 |   |  | $ | 3,336,000  |   |  | $ | 15,836,000 |   |  | $ | 15,836,000 | 
|Average Interest Rate             |  |         | 5.00      | %       |  |         | 5.00      | %       |  |         | 5.00      | %          |  |       | 5.00       | %          |  |   | 5.00      | % |  |   | 5.00       | % |  |   | 5.00       | % |  |   |            | 



---



|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest rate is based upon a weekly
    remarketing of the bonds.                                                                                                             
|   
|(2) | Consists of debt under which interest rates will
    fluctuate based upon changes in the prime rate or LIBOR.                                                                      
|   
|(3) | The interest rate reflects an effective rate
    derived from the notes stated rate of 12% and the
    amortization effect of stock warrants, loan premium and
    financing cost.

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 4. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Based on evaluations as of a date within
90 days of the filing date of this report, our principal
executive officer and principal financial officer, with the
participation of our management team, have concluded that our
disclosure controls and procedures (as defined in
Rules 13a-14 (c) and 15d-14 (c) under the
Securities Exchange Act) are effective to ensure that
information required to be disclosed by us in reports that we
file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.

Changes in Internal Controls

There were no significant changes in our internal
controls or in other factors that could significantly affect
these internal controls subsequent to the date of their most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.

Forward-Looking Statements

Statements contained in this Quarterly Report on
Form 10-Q 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

22



---



##### Table of Contents



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.





PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

In September 2001, the Company filed a motion for
declaratory judgment to determine its liability as a result of a
fuel spill on April 8, 2001 at the Ontario, CA. Airport. 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 the fuel spill.
The parties have reached a tentative settlement through
mediation. Trial has been continued until October 2003, pending
the outcome of the proposed settlement.

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) did not meet certain
federal regulatory guidelines. Specifically, the Environmental
Protection Agency (EPA) alleged that Mercurys
SPCC failed to provide for proper parking, secondary
containment, and proper drainage of its refueler trucks. Mercury
entered into discussions with the EPA and responded to the NOV.
On January 29, 2003, the EPA again notified the Company of
some deficiencies in its latest SPCC and requested that Mercury
submit a written response to its allegations within
30 days. On March 14, 2003, Mercury received a Notice
of Violation from the United States Environmental Protection
Agency, Region 5 (EPA) alleging certain
deficiencies in the SPCC for its Fort Wayne, Indiana facility,
submitted to EPA in November 2002. Mercury believes that it has
resolved all deficiencies except for alleged deficiencies
related to: 1) secondary containment for refueler trucks,
and 2) secondary containment for discrete fuel loading
areas. Pursuant to an agreement detailed in a letter submitted
to EPA on April 16, 2003, Mercury has been permitted to
suspend modifications to its SPCC regarding the installation of
secondary containment for its refueler trucks, pending
resolution of federal regulatory issues associated with
secondary containment for such trucks. EPA has also extended
national compliance with regulations related to discrete loading
areas until August 17, 2004.

On October 31, 2002 a complaint was filed
before the National Labor Relations Board Region 12 on
behalf of the Transport Workers Union of America,
Local 525, AFL-CIO alleging that Maytag Aircraft
Corporation has been engaging in unfair labor practices as set
forth in the National Labor Relations Act at its Patrick Air
Force Base location. On April 11, 2003, a settlement
agreement was fully executed. The Company agreed to pay
approximately $170,000 plus applicable payroll taxes.

On November 18, 2002, Investorwatch LLC
filed an action in the Superior Court of the State of California
for the County of Los Angeles, Central District alleging
derivative and direct claims against Mercury and certain of its
affiliates based upon alleged wrongful conduct in connection
with certain transactions entered into by Mercury, including
certain related party transactions, which transactions were
previously disclosed by Mercury. On February 18, 2003, the
plaintiff filed a dismissal without prejudice with the court.

On November 27, 2002, Andrew J. Chitiea
filed a shareholder verified derivative complaint in the
Superior Court of the State of California, County of San Diego,
North County Division alleging that certain directors of the
Company breached their fiduciary duty to the Company. On
February 13, 2003, the plaintiff files a dismissal without
prejudice with the court to dismiss the complaint and the entire
action of all parties and causes of action.

On February 26, 2003, Robert Bosch, filed an
action in the United States District Court, Eastern District of
New York against Excel Cargo, Inc. and others, seeking
$1.5 million in damages for damaged cargo. The

23



---



##### Table of Contents



Company is in the process of responding to the
complaint. Mercury does not believe the outcome of this claim
will have a significant impact on its financial position or
operating results.


On April 16,2003, the Plan Committee of
Shuttle America Corp filed a Adversary Proceeding in the United
States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The Company
believes that it has significant defenses in this matter. The
Companys answer is due on May 16, 2003. Mercury does
not believe this matter will have a significant impact on its
financial position or operating results.

The Company is also a defendant in certain
litigation arising in the normal course of business. In the
opinion of management, the ultimate resolution of such
litigation will not have a significant effect on its financial
position or operating results. Reference is made to the SEC
Form 10-Q for the quarterly period ended December 31,
2002 for additional litigation with respect to which no material
developments have occurred in the current quarter.






|        |                     
|------- | --------------------
|Item 2. | Change in Securities

None






|        |                                   
|------- | ----------------------------------
|Item 3. | Default Upon Senior
    Securities

None






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

None






|        |                  
|------- | -----------------
|Item 5. | Other Information

None






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits.

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                         
|------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 2.1 |             |  | Agreement and Plan of Merger adopted
    January 9, 2001.(17)                                                                                                                                                                                                                                                                           
|        | 2.2 |             |  | Certificate of Merger.(17)                                                                                                                                                                                                                                                                                                              
|        | 3.1 |             |  | Certificate of Incorporation.(17)                                                                                                                                                                                                                                                                                                       
|        | 3.2 |             |  | Amended and Restated Bylaws of Mercury Air Group,
    Inc. adopted December 7, 2002.(25)                                                                                                                                                                                                                                                
|        | 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)                                                                                                                                                                                                         

24



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                    
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 4.7   |             |  | Amendment No. 2 dated as of
    September 30, 2001 by and between J.H. Whitney Mezzanine
    Fund, L.P. and Mercury Air Group, Inc. to the Securities
    Purchase Agreement.(19)                                                  
|        | 4.8   |             |  | Waiver Agreement dated as of November 26,
    2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine,
    L.P.(21)                                                                                                          
|        | 4.9   |             |  | Waiver Agreement dated as of December 21,
    2001 among Mercury Air Group, inc. and J.H. Whitney Mezzanine,
    L.P.(21)                                                                                                          
|        | 4.10  |             |  | Waiver Agreement dated as of June 26, 2002
    among Mercury Air Group, inc. and J.H. Whitney Mezzanine,
    L.P.(24)                                                                                                              
|        | 4.11  |             |  | Amendment No. 3 to Securities Purchase
    Agreement by and between Mercury Air Group, Inc., and J. H.
    Whitney Mezzanine Fund, L.P. dated as of December 30,
    2002.(26)                                                     
|        | 4.12  |             |  | Amended and Restated J.H. Whitney Mezzanine Fund,
    L.P. Warrant dated September 10, 1999(26)                                                                                                                                    
|        | 4.13  |             |  | Amended and Restated J. H. Whitney Mezzanine
    Fund, L.P. Senior Subordinated Promissory Note dated
    September 10, 1999(26)                                                                                                   
|        | 4.14  |             |  | Security Agreement by and between Mercury Air
    Group, Inc. and each of its Subsidiaries hereto as Obligors and
    J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of
    December 30, 2002.(26)                     
|        | 4.15  |             |  | Subordination Agreement among J.H. Whitney
    Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and
    Mercury Air Group, Inc. and Certain of its subsidiaries
    signatory thereto, dated as of December 30, 2002(26)
|        | 4.16  |             |  | Loan and Security Agreement by and among Foothill
    Capital Corporation and Mercury Air Group, Inc. and certain
    subsidiaries signatory thereto, dated as of December 30,
    2002.(26)                                       
|        | 4.17  |             |  | First Amendment to Loan and Security Agreement by
    and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its Subsidiaries, dated March 12, 2003.                                                
|        | 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  |             |  | Non-Qualified Stock Option Agreement dated
    March 21, 1996, by and between Frederick H. Kopko and
    Mercury Air Group, Inc.(6)*                                                                                               
|        | 10.6  |             |  | Companys 1998 Long-Term Incentive Plan.(10)*                                                                                                                                                                                      
|        | 10.7  |             |  | Companys 1998 Directors Stock Option
    Plan.(10)*                                                                                                                                                                               
|        | 10.8  |             |  | 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)     
|        | 10.9  |             |  | First Amendment to Revolving Credit and Term Loan
    Agreement dated as of September 10, 1999.(14)                                                                                                                                
|        | 10.10 |             |  | Second Amendment to Revolving Credit and Term
    Loan Agreement dated as of March 31, 2000.(14)                                                                                                                                   
|        | 10.11 |             |  | Third Amendment, Waiver and Consent to Revolving
    Credit and Term Loan Agreement dated as of August 11,
    2000.(14)                                                                                                           
|        | 10.12 |             |  | The Companys 401(k) Plan consisting of CNA
    Trust Corporation. Regional Prototype Defined Contribution Plan
    and Trust and Adoption Agreement.(14)*                                                                         
|        | 10.13 |             |  | Employment Agreement dated July 31, 2000
    between the Company and Dr. Philip J. Fagan.(15)*                                                                                                                                     

25



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 10.14 |             |  | Fourth Amendment to Revolving Credit and Term
    Loan Agreement dated as of November 14, 2000.(16)                                                          
|        | 10.15 |             |  | Amendment No. 1 to Mercury Air Group, Inc.
    1998 Long-Term Incentive Option Plan as of August 22,
    2000.(16)*                                          
|        | 10.16 |             |  | Amendment No. 1 to Mercury Air Group, Inc.
    1998 Directors Stock Option Plan as of August 22, 2000.(16)*                                                  
|        | 10.17 |             |  | Limited Waiver letter Agreement to Revolving
    Credit and Term Loan Agreement dated as of September 21,
    2001.(18)                                      
|        | 10.18 |             |  | Fifth Amendment to Revolving Credit and Term loan
    Agreement dated as of September 21, 2001.(18)                                                          
|        | 10.19 |             |  | Limited Consent letter Agreement to Revolving
    Credit and Term Loan Agreement dated as of September 30,
    2001.(19)                                     
|        | 10.20 |             |  | 2001 Mercury Air Group, Inc. Stock Incentive
    Plan.(20)                                                                                                   
|        | 10.21 |             |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of December 31, 2001.(21)                                                
|        | 10.22 |             |  | 2002 Management Stock Purchase Plan.(22)                                                                                                                     
|        | 10.23 |             |  | Amended and Restated Employment Agreement dated
    May 22, 2002 between Mercury Air Group, Inc. and
    Joseph A. Czyzyk.(22)*                              
|        | 10.24 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Wayne J. Lovett(22)*                                                         
|        | 10.25 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and John Enticknap(22)*                                                          
|        | 10.26 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Mark Coleman(22)*                                                            
|        | 10.27 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Steven S. Antonoff(22)*                                                      
|        | 10.28 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Robert Schlax(22)*                                                           
|        | 10.29 |             |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of June 27, 2002.(24)                                                    
|        | 10.30 |             |  | Sale-Leaseback agreement made by and between CFK
    Realty Partners, LLC and Mercury air Group, Inc. dated
    December 15, 2001.(24)                       
|        | 10.31 |             |  | Amendment to Sale-Leaseback agreement made by and
    between CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                       
|        | 10.32 |             |  | Promissory Note by CFK Partners, LLC in favor of
    Mercury Air Group, Inc.(24)                                                                             
|        | 10.33 |             |  | Limited Waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as June 27, 2002.(24)                                                       
|        | 10.34 |             |  | Amendment to No. 1 made to Amended and
    Restated Employment Agreement dated May 22, 2002 between
    Mercury Air Group, Inc. and Joseph A. Czyzyk.*(24)   
|        | 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                                           

26



---



##### Table of Contents





---



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| | * | 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. 33-65085on 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.    
|    
|(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.                                   

27



---



##### Table of Contents





|     |                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(23) | Such document was previously filed as an Exhibit
    to the Companys current Report on Form 8-K on
    July 11, 2002 and is incorporated herein by reference.                          
|    
|(24) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 2002 and is incorporated herein
    by reference.
|    
|(25) | Such document was previously filed as an Exhibit
    to the Companys current Report on Form 8-K on
    December 7,2002 and is incorporated herein by reference.                        
|    
|(26) | Such document was previously filed as an Exhibit
    to the Companys current Report on Form 8-K on
    December 30, 2002 and is incorporated herein by reference.                      

(b) Reports on Form 8-K:

None.

28



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                              
| | -----------------------------
| | MERCURY AIR GROUP, INC.      
| | Registrant                   
|
| | /s/ JOSEPH CZYZYK            
| |                              
| | Joseph Czyzyk                
| | Chief Executive Officer      
|
| | /s/ ROBERT SCHLAX            
| |                              
| | Robert Schlax                
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: May 13, 2003

29



---



##### Table of Contents






CERTIFICATION

I, Joseph Czyzyk, certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Mercury Air Group,
Inc.;

2.     Based on my
knowledge, this quarterly 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 quarterly
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents
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 quarterly report;

4.     The registrants
other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared;
|
| | b.     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this quarterly report (the Evaluation Date);
    and                                                                                                      
|
| | c.     presented in the
    quarterly report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                 

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent function):



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

6.     The
registrants other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                  
| | -----------------
| | /s/ JOSEPH CZYZYK
| |                  
| | Joseph Czyzyk    
| | President and CEO

Date: May 13, 2003

30



---



##### Table of Contents






CERTIFICATION

I, Robert Schlax, certify that:

1.     I have reviewed
this quarterly report on Form 10-Q of Mercury Air Group,
Inc.;

2.     Based on my
knowledge, this quarterly 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 quarterly
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents
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 quarterly report;

4.     The registrants
other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared;
|
| | b.     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this quarterly report (the Evaluation Date);
    and                                                                                                      
|
| | c.     presented in the
    quarterly report our conclusions about the effectiveness of the
    disclosure controls and procedures based on our evaluation as of
    the Evaluation Date;                                                                                                                                 

5.     The
registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent function):



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

6.     The
registrants other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                              
| | -----------------------------
| | /s/ ROBERT SCHLAX            
| |                              
| | Robert Schlax                
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: May 13, 2003

31