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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A

(Mark One)

|    |  |                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------
|[X] |  | Amendment No. 1 to quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

|                                              |  |                                                                                         
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------
|[   ]                                         |  | 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                         |  | 90066                                  
|                                                               |  |                                        
|(Address of principal executive offices)                       |  | (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 [X]     No [   ]

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

|                              |  |                                                     
|----------------------------- |  | ----------------------------------------------------
|Title                         |  | Number of Shares Outstanding
As of February 11, 2002
|                              |  |                                                     
|Common Stock, $0.01 Par Value |  | 6,577,380                                           





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INTRODUCTORY NOTE

The registrant is filing this Form 10-Q/A to give effect to the
restatement as discussed in Note 10 to the consolidated financial
statements. Only Part 1, Items 1 and 2 of the original 10-Q
filing are being amended and restated as part of this 10-Q/A.



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TABLE OF CONTENTS



|               |                                                                                                |                                                     |  |  |  |  |  | 
|-------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------- |  |  |  |  |  | 
|               | Item 1. Financial Statements                                                                  
|               |                                                                                                | CONSOLIDATED BALANCE SHEETS (AS RESTATED)          
|               |                                                                                                | CONSOLIDATED STATEMENTS OF INCOME (AS RESTATED)    
|               |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
|               |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS         
|               | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|SIGNATURES    
|CERTIFICATIONS



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##### Table of Contents






Item 1. Financial Statements




MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |            |            |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------- | --------------------------------------- | ---------- | -------------------------- | ----------- | ---------- | ---------- | - | ---------- | 
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            | (As
restated, See Note 10)
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            | DECEMBER 31,               |             | JUNE 30,  
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            | 2001                       |             | 2001      
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             | ASSETS                                  |            |                            |             |            |            |   |            | 
|CURRENT ASSETS:                                                                                                                             |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            | Cash and cash equivalents                                                                                             |                                                                                                         | $           | 3,215,000                               |            |                            | $           | 3,886,000  |           
|                                                                                                                                            | Trade accounts receivable, net of allowance for doubtful accounts
of $2,270,000 at 12/31/01 and $1,653,000 at 6/30/01 |                                                                                                         |             | 44,062,000                              |            |                            |             | 53,530,000 |           
|                                                                                                                                            | Inventories, principally aviation fuel                                                                                |                                                                                                         |             | 3,136,000                               |            |                            |             | 4,069,000  |           
|                                                                                                                                            | Prepaid expenses and other current assets                                                                             |                                                                                                         |             | 5,446,000                               |            |                            |             | 2,882,000  |           
|                                                                                                                                            | Net assets of discontinued operations (Note 2)                                                                        |                                                                                                         |             |                                         |            |                            |             | 4,338,000  |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       | Total current assets                                                                                    |             |                                         | 55,859,000 |                            |             |            | 68,705,000 |  
|PROPERTY, EQUIPMENT AND LEASEHOLDS , net of accumulated
depreciation and amortization of $53,664,000 at 12/31/01 and $50,811,000
at 6/30/01 |                                                                                                                       |                                                                                                         | 68,931,000  |                                         |            |                            | 73,133,000  |           
|NOTES RECEIVABLE                                                                                                                            |                                                                                                                       |                                                                                                         | 1,784,000   |                                         |            |                            | 1,510,000   |           
|OTHER ASSETS                                                                                                                                |                                                                                                                       |                                                                                                         | 7,946,000   |                                         |            |                            | 9,140,000   |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       | $                                                                                                       | 134,520,000 |                                         |            | $                          | 152,488,000 |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             | LIABILITIES AND STOCKHOLDERS EQUITY    |            |                            |             |            |            |   |            | 
|CURRENT LIABILITIES:                                                                                                                        |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            | Accounts payable                                                                                                      |                                                                                                         | $           | 21,012,000                              |            |                            | $           | 31,668,000 |           
|                                                                                                                                            | Accrued expenses and other current liabilities                                                                        |                                                                                                         |             | 8,828,000                               |            |                            |             | 10,357,000 |           
|                                                                                                                                            | Income tax payable                                                                                                    |                                                                                                         |             | 213,000                                 |            |                            |             | 96,000     |           
|                                                                                                                                            | Current
portion of long-term debt (Note 5)                                                                            |                                                                                                         |             | 29,648,000                              |            |                            |             | 7,461,000  |           
|                                                                                                                                            | Senior
Subordinated Note, current (Note 5)                                                                            |                                                                                                         |             | 23,123,000                              |            |                            |             |            |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       | Total current liabilities                                                                               |             |                                         | 82,824,000 |                            |             |            | 49,582,000 |  
|LONG-TERM
DEBT (NOTE 5)                                                                                                                     |                                                                                                                       |                                                                                                         | 15,292,000  |                                         |            |                            | 44,560,000  |           
|DEFERRED
RENT                                                                                                                               |                                                                                                                       |                                                                                                         | 1,649,000   |                                         |            |                            | 1,354,000   |           
|DEFERRED INCOME TAXES                                                                                                                       |                                                                                                                       |                                                                                                         | 401,000     |                                         |            |                            | 380,000     |           
|SENIOR SUBORDINATED NOTE (Note 5)                                                                                                           |                                                                                                                       |                                                                                                         |             |                                         |            |                            | 23,030,000  |           
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                                      |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|STOCKHOLDERS EQUITY:                                                                                                                       |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       | Preferred Stock  $.01 par value; authorized 3,000,000 shares;
no shares outstanding                    |             |                                         |            |                            |             |            |            |  
|                                                                                                                                            |                                                                                                                       | Common Stock  $ .01 par value; authorized 18,000,000 shares;
outstanding 6,577,380 shares at 12/31/01; |             |                                         |            |                            |             |            |            |  
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             | outstanding 6,576,680 shares at 6/30/01 |            |                            | 66,000      |            |            |   | 66,000     | 
|                                                                                                                                            |                                                                                                                       | Additional paid-in capital                                                                              |             |                                         | 21,454,000 |                            |             |            | 21,442,000 |  
|                                                                                                                                            |                                                                                                                       | Retained earnings                                                                                       |             |                                         | 13,595,000 |                            |             |            | 12,835,000 |  
|                                                                                                                                            |                                                                                                                       | Accumulated
other comprehensive loss (Note 8)                                                           |             |                                         | (228,000   | )                          |             |            | (228,000   | )
|                                                                                                                                            |                                                                                                                       | Notes receivable from sale of stock                                                                     |             |                                         | (533,000   | )                          |             |            | (533,000   | )
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             | Total stockholders equity              |            |                            | 34,354,000  |            |            |   | 33,582,000 | 
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           
|                                                                                                                                            |                                                                                                                       | $                                                                                                       | 134,520,000 |                                         |            | $                          | 152,488,000 |           
|                                                                                                                                            |                                                                                                                       |                                                                                                         |             |                                         |            |                            |             |           

See accompanying notes to
consolidated financial statements

2



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##### Table of Contents






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

|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |           |             |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------- | ----------- | ------------------------------------------------------ | ----------- | -------------------------- | ----------- | ------------------ | ----------- | ---- | ---------- | ------- | ---------- | - | ----------- | --------- | ----------- | - | ---------- | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             | (As restated, See Note 10)
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                           
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             | Six Months Ended           |             | Three Months Ended
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             | December 31,               |             | December 31,      
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                   
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             | 2001                       |             | 2000               |             | 2001 |            | 2000   
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |        
|Sales and Revenues:                                                                                                                |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            | Sales                                         |             | $                                                      | 149,902,000 |                            |             | $                  | 199,131,000 |      |            | $       | 69,459,000 |   |             | $         | 109,455,000 |  
|                                                                                                                                   |                                                                            | Service revenues                              |             |                                                        | 45,941,000  |                            |             |                    | 46,357,000  |      |            |         | 22,632,000 |   |             |           | 24,638,000  |  
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               | 195,843,000 |                                                        |             |                            | 245,488,000 |                    |             |      | 92,091,000 |         |            |   | 134,093,000 |          
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|Costs and Expenses:                                                                                                                |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            | Cost of sales                                 |             |                                                        | 129,383,000 |                            |             |                    | 180,069,000 |      |            |         | 59,094,000 |   |             |           | 99,259,000  |  
|                                                                                                                                   |                                                                            | Operating expenses                            |             |                                                        | 50,932,000  |                            |             |                    | 46,282,000  |      |            |         | 25,193,000 |   |             |           | 24,553,000  |  
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               | 180,315,000 |                                                        |             |                            | 226,351,000 |                    |             |      | 84,287,000 |         |            |   | 123,812,000 |          
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               |             | Gross Margin (Excluding depreciation
and amortization) |             |                            | 15,528,000  |                    |             |      | 19,137,000 |         |            |   | 7,804,000   |           |             |   | 10,281,000 | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|Expenses (Income):                                                                                                                 |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            | Selling, general and administrative           |             |                                                        | 4,738,000   |                            |             |                    | 4,156,000   |      |            |         | 2,778,000  |   |             |           | 2,124,000   |  
|                                                                                                                                   |                                                                            | Provision for bad debts                       |             |                                                        | 772,000     |                            |             |                    | 1,899,000   |      |            |         | 187,000    |   |             |           | 1,099,000   |  
|                                                                                                                                   |                                                                            | Depreciation and amortization                 |             |                                                        | 4,684,000   |                            |             |                    | 4,652,000   |      |            |         | 2,380,000  |   |             |           | 2,340,000   |  
|                                                                                                                                   |                                                                            | Interest expense                              |             |                                                        | 2,991,000   |                            |             |                    | 3,857,000   |      |            |         | 1,465,000  |   |             |           | 1,929,000   |  
|                                                                                                                                   |                                                                            | Costs and expenses of stock offering (Note 1) |             |                                                        | 985,000     |                            |             |                    |             |      |            |         | 985,000    |   |             |           |             |   |            | 
|                                                                                                                                   |                                                                            | Loss on sale of property                      |             |                                                        | 71,000      |                            |             |                    |             |      |            |         | 71,000     |   |             |           |             |   |            | 
|                                                                                                                                   |                                                                            | Interest income                               |             |                                                        | (28,000     | )                          |             |                    | (36,000     | )    |            |         | (11,000    | ) |             |           | (6,000      | )
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               | 14,213,000  |                                                        |             |                            | 14,528,000  |                    |             |      | 7,855,000  |         |            |   | 7,486,000   |          
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   | Income
(loss) from Continuing Operations Before
Provision for Income Taxes |                                               |             | 1,315,000                                              |             |                            |             | 4,609,000          |             |      |            | (51,000 | )          |   |             | 2,795,000 |            
|                                                                                                                                   | Provision
(Benefit from) for Income Taxes                                  |                                               |             | 513,000                                                |             |                            |             | 1,797,000          |             |      |            | (20,000 | )          |   |             | 1,090,000 |            
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|Income
(loss) from Continuing Operations                                                                                           |                                                                            |                                               | 802,000     |                                                        |             |                            | 2,812,000   |                    |             |      | (31,000    | )       |            |   | 1,705,000   |          
|(Loss) Income from Discontinued Operations net of
income tax (benefit) charge of ($27,000) in 2001 and
$81,000 and $50,000 in 2000 |                                                                            |                                               | (42,000     | )                                                      |             |                            | 126,000     |                    |             |      |            |         |            |   | 77,000      |           |             |   |            | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|Net
Income (loss)                                                                                                                  |                                                                            | $                                             | 760,000     |                                                        |             | $                          | 2,938,000   |                    |             | $    | (31,000    | )       |            | $ | 1,782,000   |          
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|Net
Income (loss) Per Common Share (Note 6):                                                                                       |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               | Basic:      |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |           |             |   |           
|                                                                                                                                   |                                                                            |                                               |             | From Continuing Operations                             |             | $                          | 0.12        |                    |             | $    | 0.43       |         |            | $ | (0.00       | )         |             | $ | 0.26       | 
|                                                                                                                                   |                                                                            |                                               |             | From Discontinued Operations                           |             |                            | (0.01       | )                  |             |      | 0.02       |         |            |   |             |           |             |   | 0.01       | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               |             | Net
income (loss)                                      |             | $                          | 0.12        |                    |             | $    | 0.45       |         |            | $ | (0.00       | )         |             | $ | 0.27       | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               | Diluted:    |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |           |             |   |           
|                                                                                                                                   |                                                                            |                                               |             | From Continuing Operations                             |             | $                          | 0.12        |                    |             | $    | 0.42       |         |            | $ | (0.00       | )         |             | $ | 0.25       | 
|                                                                                                                                   |                                                                            |                                               |             | From Discontinued Operations                           |             |                            | (0.01       | )                  |             |      | 0.02       |         |            |   |             |           |             |   | 0.02       | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          
|                                                                                                                                   |                                                                            |                                               |             | Net
income (loss)                                      |             | $                          | 0.11        |                    |             | $    | 0.44       |         |            | $ | (0.00       | )         |             | $ | 0.27       | 
|                                                                                                                                   |                                                                            |                                               |             |                                                        |             |                            |             |                    |             |      |            |         |            |   |             |          

See accompanying notes to
consolidated financial statements

3



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##### Table of Contents






MERCURY AIR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |             |             |             |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | ---------- | ----------------------------- | ---------- | --------- | ----------- | ----------- | ----------- | -
|                                                                                |                                                            |                                                                |                                                     |            | (As restated, See Note 10)   
|                                                                                |                                                            |                                                                |                                                     |            |                              
|                                                                                |                                                            |                                                                |                                                     |            | Six Months Ended December 31,
|                                                                                |                                                            |                                                                |                                                     |            |                              
|                                                                                |                                                            |                                                                |                                                     |            | 2001                          |            | 2000     
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |          
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                | Net income                                                 |                                                                | $                                                   | 760,000    |                               |            | $         | 2,938,000   |            
|                                                                                | Less: (Loss) Income from discontinued operations           |                                                                |                                                     | (42,000    | )                             |            |           | 126,000     |            
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                | Income from continuing operations                          |                                                                |                                                     | 802,000    |                               |            |           | 2,812,000   |            
|                                                                                | Adjustments to derive cash flow from
Operating activities: |                                                                |                                                     |            |                               |            |           |             |            
|                                                                                |                                                            | Loss on sale of property                                       |                                                     |            | 71,000                        |            |           |             |             |            
|                                                                                |                                                            | Bad debt expense                                               |                                                     |            | 772,000                       |            |           |             | 1,899,000   |            
|                                                                                |                                                            | Depreciation and amortization                                  |                                                     |            | 4,684,000                     |            |           |             | 4,652,000   |            
|                                                                                |                                                            | Deferred
rent                                                  |                                                     |            | 295,000                       |            |           |             | 339,000     |            
|                                                                                |                                                            | Compensation
expense related to remeasurement of stock options |                                                     |            | 12,000                        |            |           |             |             |            
|                                                                                |                                                            | Deferred income taxes                                          |                                                     |            | 21,000                        |            |           |             | 10,000      |            
|                                                                                |                                                            | Amortization of senior subordinated note discount              |                                                     |            | 93,000                        |            |           |             | 93,000      |            
|                                                                                | Changes in operating assets and liabilities:               |                                                                |                                                     |            |                               |            |           |             |            
|                                                                                |                                                            | Trade and other accounts receivable                            |                                                     |            | 8,696,000                     |            |           |             | (14,200,000 | )          
|                                                                                |                                                            | Inventories                                                    |                                                     |            | 933,000                       |            |           |             | (1,252,000  | )          
|                                                                                |                                                            | Prepaid expenses and other current assets                      |                                                     |            | (2,564,000                    | )          |           |             | 554,000     |            
|                                                                                |                                                            | Accounts payable                                               |                                                     |            | (10,656,000                   | )          |           |             | 11,317,000  |            
|                                                                                |                                                            | Income taxes payable                                           |                                                     |            | 117,000                       |            |           |             | 1,408,000   |            
|                                                                                |                                                            | Accrued expenses and other current liabilities                 |                                                     |            | (1,529,000                    | )          |           |             | 1,860,000   |            
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                |                                                            |                                                                | Net cash provided by operating activities           |            |                               | 1,747,000  |           |             |             | 9,492,000   |  
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                | Net
decrease in other assets                               |                                                                |                                                     | 732,000    |                               |            |           | 859,000     |            
|                                                                                | Increase in notes receivable                               |                                                                |                                                     | (274,000   | )                             |            |           | (1,547,000  | )          
|                                                                                | Acquisition of businesses                                  |                                                                |                                                     |            |                               |            |           | (10,400,000 | )          
|                                                                                | Proceeds from sale of property                             |                                                                |                                                     | 2,078,000  |                               |            |           |             |            
|                                                                                | Additions to property, equipment and leaseholds            |                                                                |                                                     | (2,169,000 | )                             |            |           | (3,268,000  | )          
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                |                                                            |                                                                | Net cash provided by (used in) investing activities |            |                               | 367,000    |           |             |             | (14,356,000 | )
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                | Proceeds from long-term debt                               |                                                                |                                                     |            |                               |            |           | 11,969,000  |            
|                                                                                | Reduction of long-term debt                                |                                                                |                                                     | (7,081,000 | )                             |            |           | (5,955,000  | )          
|                                                                                | Reduction of note receivable from sale of stock            |                                                                |                                                     |            |                               |            |           | 75,000      |            
|                                                                                | Proceeds from exercise of stock options                    |                                                                |                                                     |            |                               |            |           | 187,000     |            
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                |                                                            |                                                                | Net
cash (used in) provided by financing activities |            |                               | (7,081,000 | )         |             |             | 6,276,000   |  
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|Net Cash provided by (used in) Discontinued Operations                          |                                                            |                                                                | 4,296,000                                           |            |                               |            | (117,000  | )          
|NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING OPERATIONS |                                                            |                                                                | (4,967,000                                          | )          |                               |            | 1,412,000 |            
|CASH AND CASH EQUIVALENTS, beginning of period                                  |                                                            |                                                                | 3,886,000                                           |            |                               |            | 2,143,000 |            
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|CASH AND CASH EQUIVALENTS, end of period                                        |                                                            | $                                                              | 3,215,000                                           |            |                               | $          | 3,438,000 |            
|                                                                                |                                                            |                                                                |                                                     |            |                               |            |           |            
|CASH PAID DURING THE PERIOD:                                                    |                                                            |                                                                |                                                     |            |                               |            |           |            
|                                                                                | Interest                                                   |                                                                | $                                                   | 2,943,000  |                               |            | $         | 3,816,000   |            
|                                                                                | Income taxes paid (refunded)                               |                                                                | $                                                   | 348,000    |                               |            | $         | (715,000    | )          

See accompanying notes to
consolidated financial statements

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##### Table of Contents



MERCURY AIR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

(Unaudited)

Note 1  General:

Business:

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

Risks and Uncertainties:

After taking the
restatement discussed in Note 10 into consideration, the Company was in
non-compliance with the minimum quarterly net earnings covenant included
in the Senior Secured Credit Facility as of December 31, 2001. The
Company is in discussions with the lenders associated with
this debt instrument to obtain a waiver from this covenant. Until the waiver
has been executed, the lenders have the right to provide written
notice to the Company and declare the outstanding obligation
associated with this instrument to be immediately due and
payable. If the Senior Secured Credit Facility lenders provide this
notice, the holder of the Senior Subordinated 12% Note (the
Note) has the right to provide the Company with written
notice declaring the outstanding obligations on the Note to be
immediately due and payable. The lenders have not exercised this right.
In addition to being engaged in continuing discussions
with the lenders to obtain a waiver for this covenant, the Company
has also engaged a financial advisor and is in discussions with other
lenders to provide new financing to replace the Senior Secured Credit
Facility and the Note.
There can be no assurance that the Company
could obtain financing if necessary, which may result in the Company
having inadequate financial resources to meet this obligation.
However, the Company believes it will be able to secure new financing
to replace the Senior Secured Credit Facility and the Note should the
lenders exercise their right to accelerate the maturity dates.

MercFuel, Inc:

On March 7, 2001, the Company announced its plan to create an independent
publicly traded company, MercFuel, Inc. (MercFuel). MercFuel was organized
in Delaware on October 27, 2000 as a wholly owned subsidiary of the Company.
On January 1, 2001, the Company transferred to MercFuel, the assets and
liabilities of its Fuel Sales division. On May 16, 2001 and amended twice
thereafter, MercFuel filed a registration statement related to the proposed
sale of 1,200,000 shares of common stock (the Offering). On April 30, 2001,
MercFuel agreed to sell 239,942 shares of common stock in a private placement
at a per share price of $4.35. Due to market conditions, the Company was not
able to complete the Offering and the proceeds of the private placement are
expected to be returned. The Company incurred $985,000 of expenses associated
with the Offering and private placement which were expensed in the quarter
ended December 31, 2001. The Company has also elected to withdraw MercFuels
application for registration of its
common stock; depending on market conditions and other factors, the Company may
re-file a registration statement at a later point in time. The Company may
pursue various financing options with respect to MercFuel.

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Basis of Presentation:

The accompanying unaudited financial statements reflect all adjustments
(consisting of normal, recurring accruals only) which are necessary to fairly
present the results for the interim periods. Such financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X and therefore do not include all the information or footnotes
necessary for a complete presentation. They should be read in conjunction with
the Companys Annual Report on Form 10-K for the year ended June 30, 2001 and
the notes thereto. The results of operations for the six months ended December
31, 2001 are not necessarily indicative of results for the full year.

Certain
reclassifications were made to prior year and quarter statements to
conform to the December 31, 2001 presentation.

New Accounting Pronouncements:

In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations. SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001
and eliminates the pooling-of-interest method.

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

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

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Note 2  Discontinued Operations:

On July 3, 2001, the Company completed the sale of its subsidiary, RPA
Airline Automation Services, Inc. (RPA), which provides airline revenue
accounting and management information software consisting of proprietary
software programs which are marketed to foreign and domestic airlines. The
Company has reclassified its consolidated financial statements to reflect the
sale of RPA and to segregate the revenues, direct costs and expenses (excluding
allocated costs), assets and liabilities, and cash flows of RPA. The net
operating results, net assets and net cash flows of this business have been
reported as Discontinued Operations in the accompanying consolidated
financial statements. Summarized income statement information for the six
months ended December 31, 2000 and balance sheet information as of June 30,
2001 are as follows:

|                           |  |                  |           | 
|-------------------------- |  | ---------------- | --------- | 
|                           |  | Six Months Ended
|                           |  | December 31,    
|                           |  | 2000            
|                           |  |                 
|Service revenues           |  | $                | 2,839,000 | 
|Operating expense          |  |                  | 2,489,000 | 
|                           |  |                  |           | 
|Gross margin               |  |                  | 350,000   | 
|                           |  |                  |           | 
|Other expense              |  |                  | 143,000   | 
|                           |  |                  |           | 
|Income before income taxes |  |                  | 207,000   | 
|Income tax charge          |  |                  | 81,000    | 
|                           |  |                  |           | 
|Net income                 |  | $                | 126,000   | 
|                           |  |                  |           | 

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

During the quarter ended September 30, 2001, the Company recorded a loss of
$42,000 related to sale of a building that had previously been RPAs corporate
headquarters. At December 30, 2001, the Company no longer retained any
significant assets or liabilities related to RPA.

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 April 2000, Mercury filed a collection action against AER Global
Logistics (AER) in the state of New York. AER filed a counterclaim for $1.0
million alleging among other things, tortious interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on its financial position or
operating results.

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

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

In October 2001, Mercury received notice that the California Court of
Appeals had rejected its appeal in the matter of Koye Fernandez v. Mercury Air
Group, Inc. The case was settled in January 2002. The settlement amount of
approximately $383,000 has been accrued as a liability at December 31, 2001.

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.

Note 5- Debt:

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

In addition, the
Company has a Note Payable to banks that consists principally of a
credit facility (the Senior Secured Credit Facility),
which provides for a term loan (Term Loan), an
acquisition line (Acquisition Line) and a revolving line
of credit (Revolver). The Senior Secured Credit Facility
expires in March 2004. Borrowings under the Term Loan were $8.9
million, under the Acquisition Line were $17.4 million, and under the
Revolver were $1.2 million at December 31, 2001. The Senior
Secured Credit Facility contains covenants that require the
maintenance of certain financial ratios, minimum tangible net worth
(as defined), minimum profitability levels, maximum leverage and
minimum debt service coverage and quick rations and limitation on
annual capital expenditures. Additionally, the Company is prohibited
from paying dividends in excess of $400,000 per year.

After taking the
restatement discussed in Note 10 into consideration, the Company
was in noncompliance with the minimum net earnings debt covenant
contained in the Senior Secured Credit Facility. Until a waiver of
this covenant requirement is executed, the lenders have the right
to provide written notice to the Company declaring the outstanding
obligations on the Senior Secured Credit Facility immediately due and
payable. If the Senior Secured Credit Facility lenders do provide
written notice, the holders of the Note have the right to provide
written notice to the Company declaring the outstanding obligations on
the Note to be immediately due and payable. The lenders have not
exercised this right. The Company is in discussions with the lenders
to obtain a waiver for this covenant.

As of
December 31, 2001, the total principal amount outstanding on the
Senior Secured Credit Facility and
the Note, amounting to $27,538,000 and $23,123,000 respectively, was
classified on the Companys Consolidated Balance Sheet as
Current portion of long-term debt and Senior Subordinated Note,
current.

Note 6- Earnings Per Share:

Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares and potential common shares. Potential common
shares include stock options and shares resulting from the assumed conversion
of subordinated debentures, when dilutive.

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|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|-------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ------------------ |  | ----------------- | --------- | ----------------- |  | ------- | --------- | ----- |  | ------- | --------- | ----- |  |  | --------- |  |  |  | --------- |  |  |  | --------- |  |  |  | --------- | 
|                                                                                             |  | Six Months Ended  |           | Three Months Ended
|                                                                                             |  |                   |           |                   
|                                                                                             |  | December 31, 2001 |           | December 31, 2000  |  | December 31, 2001 |           | December 31, 2000
|                                                                                             |  |                   |           |                    |  |                   |           |                  
|                                                                                             |  | Diluted           |           | Basic              |  | Diluted           |           | Basic             |  | Diluted |           | Basic |  | Diluted |           | Basic
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |      
|Weighted average number of
common shares outstanding
during the period                       |  |                   | 6,577,000 |                    |  |                   | 6,577,000 |                   |  |         | 6,516,000 |       |  |         | 6,516,000 |       |  |  | 6,577,000 |  |  |  | 6,577,000 |  |  |  | 6,531,000 |  |  |  | 6,531,000 | 
|Common share equivalents
resulting from the assumed
exercise of stock options                |  |                   | 156,000   |                    |  |                   |           |                   |  |         | 173,000   |       |  |         |           |       |  |  | 149,000   |  |  |  |           |  |  |  | 151,000   |  |  |  |          | 
|Common shares resulting
from the assumed
conversion of debentures                            |  |                   | 32,000    |                    |  |                   |          |                   |  |         | 46,000    |       |  |         |          |       |  |  | 32,000    |  |  |  |          |  |  |  | 46,000    |  |  |  |          | 
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|Weighted average number of
common and common
equivalent shares
outstanding during the
period |  |                   | 6,765,000 |                    |  |                   | 6,577,000 |                   |  |         | 6,735,000 |       |  |         | 6,516,000 |       |  |  | 6,758,000 |  |  |  | 6,577,000 |  |  |  | 6,728,000 |  |  |  | 6,531,000 | 
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 

Note 7-Segment Reporting:

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. Additionally, the Company had a fifth operating
unit, RPA, which was sold on July 3, 2001. As a result, RPAs historical
operating results have been reclassified as discontinued operations. The
segment data for the quarter and six months ended December 31, 2000 included
below has been restated to exclude amounts related to the RPA business unit.

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|                                   |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|---------------------------------- |  | ---------------------- | ------- | ---------- |  | ---------- | ------ | -------- |  | ----------- | ------ | ----- |  | ---------- | ------ | --------- |  | - | ------ |  |  | - | ------- | 
|                                   |  |                        |         |            |  |            |        |          |  |             |        |       |  | Government |        | Corporate |  |   |        | 
|                                   |  |                        |         |            |  | Fixed Base |        | Cargo    |  | Contract    |        | or    |  |            |        |          
|                                   |  | Fuel Sales             |         | Operations |  | Operations |        | Services |  | Unallocated |        | Total
|                                   |  |                        |         |            |  |            |        |          |  |             |        |      
|                                   |  | (Dollars in Thousands)
|Quarter Ended December 31, 2001    |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                           |  | $                      | 54,610  |            |  | $          | 23,122 |          |  | $           | 7,548  |       |  | $          | 6,811  |           |  |   |        |  |  | $ | 92,091  | 
|Gross Margin                       |  |                        | 1,423   |            |  |            | 3,797  |          |  |             | 873    |       |  |            | 1,711  |           |  |   |        |  |  |   | 7,804   | 
|Depreciation and Amortization      |  |                        | 16      |            |  |            | 1,468  |          |  |             | 548    |       |  |            | 191    |           |  | $ | 157    |  |  |   | 2,380   | 
|Capital Expenditures               |  |                        | 11      |            |  |            | 832    |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   | 843     | 
|Segment Assets                     |  |                        | 24,401  |            |  |            | 46,233 |          |  |             | 35,826 |       |  |            | 23,146 |           |  |   | 4,914  |  |  |   | 134,520 | 
|Quarter Ended December 31, 2000    |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                           |  | $                      | 91,760  |            |  | $          | 26,444 |          |  | $           | 8,669  |       |  | $          | 7,220  |           |  |   |        |  |  | $ | 134,093 | 
|Gross Margin                       |  |                        | 2,511   |            |  |            | 4,065  |          |  |             | 2,180  |       |  |            | 1,525  |           |  |   |        |  |  |   | 10,281  | 
|Depreciation and Amortization      |  |                        | 16      |            |  |            | 1,303  |          |  |             | 636    |       |  |            | 212    |           |  | $ | 173    |  |  |   | 2,340   | 
|Capital Expenditures               |  |                        | (26     | )          |  |            | 1,063  |          |  |             | 1,263  |       |  |            | 11     |           |  |   | 68     |  |  |   | 2,379   | 
|Segment Assets                     |  |                        | 26,532  |            |  |            | 39,331 |          |  |             | 35,614 |       |  |            | 20,557 |           |  |   | 38,979 |  |  |   | 161,013 | 
|Six Months Ended December 31, 2001 |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                           |  | $                      | 119,110 |            |  | $          | 47,084 |          |  | $           | 14,686 |       |  | $          | 14,963 |           |  |   |        |  |  | $ | 195,843 | 
|Gross Margin                       |  |                        | 3,369   |            |  |            | 7,261  |          |  |             | 1,160  |       |  |            | 3,738  |           |  |   |        |  |  |   | 15,528  | 
|Depreciation and Amortization      |  |                        | 31      |            |  |            | 2,811  |          |  |             | 1,135  |       |  |            | 384    |           |  | $ | 323    |  |  |   | 4,684   | 
|Capital Expenditures               |  |                        | 11      |            |  |            | 2,057  |          |  |             | 97     |       |  |            |        |           |  |   | 4      |  |  |   | 2,169   | 
|Segment Assets                     |  |                        | 24,401  |            |  |            | 46,233 |          |  |             | 35,826 |       |  |            | 23,146 |           |  |   | 4,914  |  |  |   | 134,520 | 
|Six Months Ended December 31, 2000 |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |  |  |   |         | 
|Revenues                           |  | $                      | 164,905 |            |  | $          | 50,335 |          |  | $           | 15,728 |       |  | $          | 14,520 |           |  |   |        |  |  | $ | 245,488 | 
|Gross Margin                       |  |                        | 4,534   |            |  |            | 7,810  |          |  |             | 3,732  |       |  |            | 3,061  |           |  |   |        |  |  |   | 19,137  | 
|Depreciation and Amortization      |  |                        | 31      |            |  |            | 2,583  |          |  |             | 1,267  |       |  |            | 428    |           |  | $ | 343    |  |  |   | 4,652   | 
|Capital Expenditures               |  |                        | 11      |            |  |            | 12,300 |          |  |             | 1,332  |       |  |            | (43    | )         |  |   | 68     |  |  |   | 13,668  | 
|Segment Assets                     |  |                        | 26,532  |            |  |            | 39,331 |          |  |             | 35,614 |       |  |            | 20,557 |           |  |   | 38,979 |  |  |   | 161,013 | 

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 $87,000 and $999,000; total bad debt
expense was $187,000 and $1,099,000 for the quarter ended December 2001 and
December 2000, respectively. Bad debt expense for fuel sales was approximately
$572,000 and $1,699,000; total bad debt expense was $772,000 and $1,899,000
for the six months ended December 31, 2001 and December 31, 2000, respectively.

Note 8  Comprehensive Income:

For the periods presented, adjustments to derive comprehensive income from
net income were insignificant.

Note 9  Subsequent Event:

In January 2002, the Company sold land and building which comprise its
corporate headquarters to CFK Realty Partners, LLC (CFK Partners) for $4.2
million, consisting of $2.8 million cash and a note receivable of $1.4 million.
The note receivable accrues interest at 5% and is due on December 31, 2002,
however, CFK Partners has options to extend the note through December 31, 2004.
Concurrently, the Company also entered into a ten-year lease for the property.

CFK Partners is a partnership consisting of three of the Companys
directors, one of whom also serves as the Companys Chief Executive Officer.
In addition, CFK Partners also owns approximately 30% of the Companys
outstanding shares.

Note 10  Reclassification and Restatement of
Financial Statements:

Subsequent
to the issuance of its interim consolidated financial statements for
the three and six months ended December 31, 2001, the Company
corrected its accounting to properly record leasehold
amortization expenses for the cargo operations, the write off of
costs for financing not completed, certain FBO operating expenses,
compensation resulting from changes in stock option terms and sales
tax adjustments. As a result, the accompanying consolidated financial
statements for the three and six months ended December 31, 2001 have
been restated from the amounts previously reported to properly
reflect such expenses. The aggregate of all adjustments was a
decrease in net income of $163,000 and $248,000 for the six and three
months ended December 31, 2001, respectively.

As a
result of the restatement, the Company is in noncompliance with the minimum quarterly net earnings debt covenant contained in the Senior Secured
Credit Facility. The Company is in discussions with the lenders to obtain a waiver for the debt covenant. Until such time as a waiver
is executed, the lenders have the right to provide written notice to the Company declaring the total obligations associated with the Senior Secured Credit Facility to be immediately due and payable. If the Senior Secured Credit
Facility lenders provide this notice, the holders of the Note have the right to provide the Company with written notice declaring the entire obligations associated
with the Note to be immediately due and payable. The lenders have not exercised this right.
Due to this right, as of December 31, 2001 the Company classified the principal amount outstanding on the Senior Secured Credit Facility and the Note as Current portion of long
term debt and Senior Subordinated Note, current, respectively, the consolidated balance sheet.

In
addition, the Company has reflected in the accompanying consolidated
financial statements certain reclassifications associated with one of
its cargo warehouse leases. These reclassifications resulted in an
increase of property, equipment and leaseholds, with a corresponding
increase of long-term deferred rent, as of December 31, 2001 and June
30, 2001, and a decrease of gross margin (excluding depreciation and
amortization), with a corresponding decrease of depreciation and
amortization expense, for the three and six months ended December
31, 2001 and 2000. The reclassifications had no effect on total
stockholders' equity, net income (loss) or earnings (loss) per share
for any period presented.

A
summary of the significant effects of the restatement and
reclassifications is as follows:

Income Statement:

|                                                                                          |          |                            |        |                                       |      |                                         |        |                |      |                |        |            |      |          |        |            |      |              |       |   |      |    |       |   |      |   |        |   |      |   |        |   |      | 
|----------------------------------------------------------------------------------------- | -------- | -------------------------- | ------ | ------------------------------------- | ---- | --------------------------------------- | ------ | -------------- | ---- | -------------- | ------ | ---------- | ---- | -------- | ------ | ---------- | ---- | ------------ | ----- | - | ---- | -- | ----- | - | ---- | - | ------ | - | ---- | - | ------ | - | ---- | 
|                                                                                          |          |                            |        | For the Six Months Ended December 31, |      | For the Three Months Ended December 31,
|                                                                                          |          |                            |        |                                       |      |                                        
|                                                                                          |          |                            |        | 2001                                  |      | 2000                                    |        | 2001           |      | 2000          
|                                                                                          |          |                            |        |                                       |      |                                         |        |                |      |               
|                                                                                          |          |                            |        | (In Thousands)                        |      | (In Thousands)                          |        | (In Thousands) |      | (In Thousands)
|                                                                                          |          |                            |        |                                       |      |                                         |        |                |      |               
|                                                                                          |          |                            |        | As                                    |      |                                         |        |                |      | As             |        |            |      |          |        | As         |      |              |       |   |      | As |      
|                                                                                          |          |                            |        | Previously                            |      | As                                      |        | Previously     |      | As             |        | Previously |      | As       |        | Previously |      | As          
|                                                                                          |          |                            |        | Reported                              |      | Restated                                |        | Reported       |      | Reclassified   |        | Reported   |      | Restated |        | Reported   |      | Reclassified
|                                                                                          |          |                            |        |                                       |      |                                         |        |                |      |                |        |            |      |          |        |            |      |             
|Gross Margin (Excluding Depreciation and
Amortization)                                    |          | $                          | 15,838 |                                       |      | $                                       | 15,528 |                |      | $              | 19,476 |            |      | $        | 19,137 |            |      | $            | 8,092 |   |      | $  | 7,804 |   |      | $ | 10,450 |   |      | $ | 10,281 |  
|Selling, General & Administration                                                         |          | $                          | 4,435  |                                       |      | $                                       | 4,738  |                |      | $              | 4,156  |            |      | $        | 4,156  |            |      | $            | 2,487 |   |      | $  | 2,778 |   |      | $ | 2,124  |   |      | $ | 2,124  |  
|Depreciation and Amortization                                                             |          | $                          | 5,030  |                                       |      | $                                       | 4,684  |                |      | $              | 4,991  |            |      | $        | 4,652  |            |      | $            | 2,553 |   |      | $  | 2,380 |   |      | $ | 2,509  |   |      | $ | 2,340  |  
|Income (Loss) from Continuing Operations
Before Provision for (Benefit from)
Income Taxes |          | $                          | 1,582  |                                       |      | $                                       | 1,315  |                |      | $              | 4,609  |            |      | $        | 4,609  |            |      | $            | 355   |   |      | $  | (51   | ) |      | $ | 2,795  |   |      | $ | 2,795  |  
|Income (Loss) from Continuing Operations                                                  |          | $                          | 965    |                                       |      | $                                       | 802    |                |      | $              | 2,812  |            |      | $        | 2,812  |            |      | $            | 217   |   |      | $  | (31   | ) |      | $ | 1,705  |   |      | $ | 1,705  |  
|Net Income (Loss)                                                                         |          | $                          | 923    |                                       |      | $                                       | 760    |                |      | $              | 2,938  |            |      | $        | 2,938  |            |      | $            | 217   |   |      | $  | (31   | ) |      | $ | 1,782  |   |      | $ | 1,782  |  
|Net Income (Loss) Per Common Share:                                                       |          |                            |        |                                       |      |                                         |        |                |      |                |        |            |      |          |        |            |      |              |       |   |      |    |       |   |      |   |        |   |      |   |        |  
|                                                                                          | Basic:   |                            |        |                                       |      |                                         |        |                |      |                |        |            |      |          |        |            |      |              |       |   |      |    |       |   |      |   |        |   |      |   |        |   |     
|                                                                                          |          | From Continuing Operations |        | $                                     | 0.15 |                                         |        | $              | 0.12 |                |        | $          | 0.43 |          |        | $          | 0.43 |              |       | $ | 0.03 |    |       | $ | 0.00 |   |        | $ | 0.26 |   |        | $ | 0.26 | 
|                                                                                          |          | Net Income                 |        | $                                     | 0.14 |                                         |        | $              | 0.12 |                |        | $          | 0.45 |          |        | $          | 0.45 |              |       | $ | 0.03 |    |       | $ | 0.00 |   |        | $ | 0.27 |   |        | $ | 0.27 | 
|                                                                                          | Diluted: |                            |        |                                       |      |                                         |        |                |      |                |        |            |      |          |        |            |      |              |       |   |      |    |       |   |      |   |        |   |      |   |        |   |     
|                                                                                          |          | From Continuing Operations |        | $                                     | 0.14 |                                         |        | $              | 0.12 |                |        | $          | 0.42 |          |        | $          | 0.42 |              |       | $ | 0.03 |    |       | $ | 0.00 |   |        | $ | 0.25 |   |        | $ | 0.25 | 
|                                                                                          |          | Net Income                 |        | $                                     | 0.14 |                                         |        | $              | 0.11 |                |        | $          | 0.44 |          |        | $          | 0.44 |              |       | $ | 0.03 |    |       | $ | 0.00 |   |        | $ | 0.27 |   |        | $ | 0.27 | 

Balance Sheet:

|                                         |  |                         |         |                     |       |            |         |              |  |   |         |  |  |   |         | 
|---------------------------------------- |  | ----------------------- | ------- | ------------------- | ----- | ---------- | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|                                         |  | As of December 31, 2001 |         | As of June 30, 2001
|                                         |  |                         |         |                    
|                                         |  | (In Thousands)          |         | (In Thousands)     
|                                         |  |                         |         |                    
|                                         |  | As                      |         |                     |       |            |         | As           |  |   |         | 
|                                         |  | Previously              |         | As                  |       | Previously |         | As          
|                                         |  | Reported                |         | Reclassified        |       | Reported   |         | Reclassified
|                                         |  |                         |         |                     |       |            |         |             
|Property, Equipment, and Leaseholds, net |  | $                       | 67,231  |                     |       | $          | 68,931  |              |  | $ | 71,779  |  |  | $ | 73,133  | 
|Total Assets                             |  | $                       | 133,308 |                     |       | $          | 134,520 |              |  | $ | 151,134 |  |  | $ | 152,488 | 
|Current
Portion of Long Term debt        |  | $                       | 7,246   |                     |       | $          | 29,648  |              |  | $ | 7,461   |  |  | $ | 7,461   | 
|Senior
Subordinated Note, Current        |  |                         |         |                     |       | $          | 23,123  |              |  |   |         |  |  |   |         | 
|Total Current Liabilities                |  | $                       | 37,585  |                     |       | $          | 82,824  |              |  | $ | 49,582  |  |  | $ | 49,582  | 
|Long-term
debt                           |  | $                       | 37,694  |                     |       | $          | 15,292  |              |  | $ | 44,560  |  |  | $ | 44,560  | 
|Senior
Subordinated Note, Long-term      |  | $                       | 23,123  |                     |       |            |         |              |  | $ | 23,030  |  |  | $ | 23,030  | 
|Deferred Rent  Non current              |  |                         |         | $                   | 1,649 |            |         |              |  | $ | 1,354   | 
|Total Liabilities                        |  | $                       | 98,803  |                     |       | $          | 100,166 |              |  | $ | 117,552 |  |  | $ | 118,906 | 
|Total
Stockholders Equity               |  | $                       | 34,505  |                     |       | $          | 34,354  |              |  | $ | 33,582  |  |  | $ | 33,582  | 

10



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##### Table of Contents






Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following managements
discussion and analysis of financial condition and results of
operations gives effect to the restatement discussed in Note 10
to the consolidated financial statements.

Results of Operations- Comparison of the Three Months Ended December 31, 2001
and December 31, 2000 and Comparison of the Six Months Ended December 31, 2001
and December 31, 2000.

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 date.

|                             |  |                               |       |                                 |  |        |       |          |  |        |       |          |  |        |       |          |  |       |      |  |  |  |       |       |  |   |       |  |  |  |       |  
|---------------------------- |  | ----------------------------- | ----- | ------------------------------- |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | ----- | ---- |  |  |  | ----- | ----- |  | - | ----- |  |  |  | ----- | -
|                             |  | Six Months Ended December 31, |       | Three Months Ended December 31,
|                             |  |                               |       |                                
|($ in millions)              |  | 2001                          |       | 2000                            |  | 2001   |       | 2000    
|                             |  |                               |       |                                 |  |        |       |         
|                             |  |                               |       |                                 |  | % of   |       |          |  |        |       | % of     |  |        |       |          |  | % of  |      |  |  |  |       | % of 
|                             |  |                               |       |                                 |  | Total  |       |          |  |        |       | Total    |  |        |       |          |  | Total |      |  |  |  |       | Total
|                             |  | Amount                        |       | Revenues                        |  | Amount |       | Revenues |  | Amount |       | Revenues |  | Amount |       | Revenues
|                             |  |                               |       |                                 |  |        |       |          |  |        |       |          |  |        |       |         
|Revenues:                    |  |                               |       |                                 |  |        |       |          |  |        |       |          |  |        |       |          |  |       |      |  |  |  |       |       |  |   |       |  |  |  |       |  
|Fuel sales                   |  | $                             | 119.1 |                                 |  |        | 60.8  | %        |  | $      | 164.9 |          |  |        | 67.2  | %        |  | $     | 54.6 |  |  |  | 59.3  | %     |  | $ | 91.8  |  |  |  | 68.4  | %
|FBOs                         |  |                               | 47.1  |                                 |  |        | 24.0  |          |  |        | 50.4  |          |  |        | 20.5  |          |  |       | 23.1 |  |  |  | 25.1  |       |  |   | 26.4  |  |  |  | 19.7  |  
|Cargo operations             |  |                               | 14.6  |                                 |  |        | 7.5   |          |  |        | 15.7  |          |  |        | 6.4   |          |  |       | 7.6  |  |  |  | 8.2   |       |  |   | 8.7   |  |  |  | 6.5   |  
|Government contract
services |  |                               | 15.0  |                                 |  |        | 7.7   |          |  |        | 14.5  |          |  |        | 5.9   |          |  |       | 6.8  |  |  |  | 7.4   |       |  |   | 7.2   |  |  |  | 5.4   |  
|                             |  |                               |       |                                 |  |        |       |          |  |        |       |          |  |        |       |          |  |       |      |  |  |  |       |       |  |   |       |  |  |  |       |  
|Total Revenue                |  | $                             | 195.8 |                                 |  |        | 100.0 | %        |  | $      | 245.5 |          |  |        | 100.0 | %        |  | $     | 92.1 |  |  |  | 100.0 | %     |  | $ | 134.1 |  |  |  | 100.0 | %
|                             |  |                               |       |                                 |  |        |       |          |  |        |       |          |  |        |       |          |  |       |      |  |  |  |       |       |  |   |       |  |  |  |       |  

|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |      |     |  |  |  |      |      |  |   |      |  |  |  |      |  
|---------------------------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ---- | --- |  |  |  | ---- | ---- |  | - | ---- |  |  |  | ---- | -
|                             |  |        |      |          |  | % of   |      |          |  |        |      | % of     |  |        |      |          |  | % of |     |  |  |  |      | % of
|                             |  |        |      |          |  | Unit   |      |          |  |        |      | Unit     |  |        |      |          |  | Unit |     |  |  |  |      | Unit
|                             |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |         
|Gross Margin(1):             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |      |     |  |  |  |      |      |  |   |      |  |  |  |      |  
|Fuel sales                   |  | $      | 3.3  |          |  |        | 2.8  | %        |  | $      | 4.5  |          |  |        | 2.7  | %        |  | $    | 1.4 |  |  |  | 2.6  | %    |  | $ | 2.5  |  |  |  | 2.7  | %
|FBOs                         |  |        | 7.3  |          |  |        | 15.4 |          |  |        | 7.8  |          |  |        | 15.5 |          |  |      | 3.8 |  |  |  | 16.4 |      |  |   | 4.1  |  |  |  | 15.4 |  
|Cargo operations             |  |        | 1.2  |          |  |        | 7.9  |          |  |        | 3.7  |          |  |        | 23.7 |          |  |      | 0.9 |  |  |  | 11.6 |      |  |   | 2.2  |  |  |  | 25.1 |  
|Government contract
services |  |        | 3.7  |          |  |        | 25.0 |          |  |        | 3.1  |          |  |        | 21.1 |          |  |      | 1.7 |  |  |  | 25.1 |      |  |   | 1.5  |  |  |  | 21.1 |  
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |      |     |  |  |  |      |      |  |   |      |  |  |  |      |  
|Total Gross Margin           |  | $      | 15.5 |          |  |        | 7.9  | %        |  | $      | 19.1 |          |  |        | 7.8  | %        |  | $    | 7.8 |  |  |  | 8.5  | %    |  | $ | 10.3 |  |  |  | 7.7  | %
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |      |     |  |  |  |      |      |  |   |      |  |  |  |      |  

|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |          |  |       |      |   |  |  |      |       |  |   |     |  |  |  |     |  
|--------------------------------------------------- |  | ------ | ---- | -------- |  | ------ | --- | -------- |  | ------ | --- | -------- |  | ------ | --- | -------- |  | ----- | ---- | - |  |  | ---- | ----- |  | - | --- |  |  |  | --- | -
|                                                    |  |        |      |          |  | % of   |     |          |  |        |     | % of     |  |        |     |          |  | % of  |      |   |  |  |      | % of 
|                                                    |  |        |      |          |  | Total  |     |          |  |        |     | Total    |  |        |     |          |  | Total |      |   |  |  |      | Total
|                                                    |  | Amount |      | Revenues |  | Amount |     | Revenues |  | Amount |     | Revenues |  | Amount |     | Revenues
|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |         
|Selling, general and
administrative                 |  | $      | 4.7  |          |  |        | 2.4 | %        |  | $      | 4.1 |          |  |        | 1.7 | %        |  | $     | 2.8  |   |  |  | 3.0  | %     |  | $ | 2.1 |  |  |  | 1.6 | %
|Provision for bad debts                             |  |        | 0.8  |          |  |        | 0.4 |          |  |        | 1.9 |          |  |        | 0.8 |          |  |       | 0.2  |   |  |  | 0.2  |       |  |   | 1.1 |  |  |  | 0.8 |  
|Depreciation and
amortization                       |  |        | 4.7  |          |  |        | 2.4 |          |  |        | 4.7 |          |  |        | 1.9 |          |  |       | 2.4  |   |  |  | 2.6  |       |  |   | 2.4 |  |  |  | 1.7 |  
|Interest expense and other                          |  |        | 4.0  |          |  |        | 2.0 |          |  |        | 3.8 |          |  |        | 1.6 |          |  |       | 2.5  |   |  |  | 2.7  |       |  |   | 1.9 |  |  |  | 1.4 |  
|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |          |  |       |      |   |  |  |      |       |  |   |     |  |  |  |     |  
|Income
(loss) before income taxes                   |  |        | 1.3  |          |  |        | 0.7 |          |  |        | 4.6 |          |  |        | 1.9 |          |  |       | (0.1 | ) |  |  | (0.0 | )     |  |   | 2.8 |  |  |  | 2.1 |  
|Provision for income taxes                          |  |        | 0.5  |          |  |        | 0.3 |          |  |        | 1.8 |          |  |        | 0.7 |          |  |       | 0.0  |   |  |  | 0.0  |       |  |   | 1.1 |  |  |  | 0.8 |  
|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |          |  |       |      |   |  |  |      |       |  |   |     |  |  |  |     |  
|Income
(loss) from continuing
operations before tax |  |        | 0.8  |          |  |        | 0.4 |          |  |        | 2.8 |          |  |        | 1.1 |          |  |       | (0.1 | ) |  |  | (0.0 | )     |  |   | 1.7 |  |  |  | 1.3 |  
|(Loss) Income from
discontinued operations          |  |        | (0.1 | )        |  |        |    |          |  |        | 0.1 |          |  |        |    |          |  |       |     |   |  |  |     |       |  |   | 0.1 |  |  |  | 0.1 |  
|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |          |  |       |      |   |  |  |      |       |  |   |     |  |  |  |     |  
|Net
income (loss)                                   |  | $      | 0.8  |          |  |        | 0.4 | %        |  | $      | 2.9 |          |  |        | 1.2 | %        |  | $     | (0.1 | ) |  |  | (0.0 | )%    |  | $ | 1.8 |  |  |  | 1.3 | %
|                                                    |  |        |      |          |  |        |     |          |  |        |     |          |  |        |     |          |  |       |      |   |  |  |      |       |  |   |     |  |  |  |     |  



---

|(1) |  | Gross margin as used here and throughout Managements Discussion excludes
depreciation and amortization and selling, general and administrative expense.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

11



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##### Table of Contents



Three Months ended December 31, 2001 Compared to December 31, 2000

Revenue decreased by 31.3% to $92.1 million in the current period from $134.1
million in the prior year primarily due to lower fuel prices and fuel volume
in the current period. Gross margin decreased 24.1% to $7.8 million in the
current period from $10.3 million a year ago, primarily due to declines in
Cargo operations and fuel sales. The declines were, in part, caused by the
slow down in the airline industry resulting from the events of September 11,
2001.

Revenues from fuel sales represented 59.3% of total revenues in the current
period compared to 68.4% of revenues a year ago. Revenues from fuel sales
decreased 40.5% to $54.6 million from $91.8 million last year. The decrease
from fuel sales was due to a decrease of 32% in the price of fuel sold and a
decrease of 12.6% in volume sold. Gross margin from fuel sales was $1.4
million in the current period compared with $2.5 million last year primarily
due to lower per gallon margins in the current period caused by a change in the
customer mix. The volume decline was, in part, caused by the slow down in the
airline industry resulting from the events of September 11, 2001. Revenues and
gross margin from fuel sales includes the activities of Mercurys contract
fueling business.

Revenues from FBOs decreased 12.6 % to $23.1 million in the current period
compared to $26.4 million a year ago. The decrease in revenue was primarily due
to a decline in fuel prices of 11% and a reduction in fuel volume of 5.0%.
Gross margin decreased 7.8% in the current period to
$3.8 million from $4.1 million last year due to lower volume.

Revenues from cargo operations decreased 12.9% to $7.6 million in the current
period from $8.7 million a year ago. Revenues were lower in cargo handling,
brokerage and general sales agency (GSA), due to softness in the
market place causing a decline in revenues from existing customers. Gross
margin from cargo operations in the current period decreased 60.0% to
$0.9 million from $2.2 million in the year ago period primarily due to lower
revenues. The Companys operations in Atlanta were impacted by higher lease
costs associated with a new facility and lower revenues primarily caused by the
loss of an account which had represented approximately 30% of its revenues in
the year ago period and none in the current period. Revenues from existing
customers at the Companys LAX operations for both warehouse and GSA were lower
compared to last year due to a softer marketplace. The Cargo business has been
impacted by a slowdown in worldwide cargo tonnage and shipments.

Revenues from government contract services decreased 5.7% in the current period
to $6.8 million from $7.2 million in the year ago period due to the loss of the
Yokota, Japan contract in September 2001 and lower weather observation and
forecasting revenues from fewer contracts, partially offset by new contracts
added in fiscal 2001 and in the current period. The Yokota, Japan contract
provided $1.4 million or 18.7% of total revenues
during the quarter ended December 31, 2000 and $5.1 million or 17.6% of total
revenues during fiscal year 2001. Gross margin from government contract
services in the current period increased 12.2% to $1.7 million from $1.5
million last year due to higher margins.

Selling, general and administrative expenses
increased 30.8% to $2.8 million in
the current period from $2.1 million a year ago due to a litigation settlement of
$383,000 and the write off $291,000 of capitalized loan costs in the current period. See Note 4.

12



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##### Table of Contents



Provision for bad debts decreased 83.0% in the current period to $0.2 million
from $1.1 million a year ago primarily due to lower sales in the current
period and lower reserve requirements.

Depreciation and amortization expense was $2.4 million in the current period
compared to $2.4 million a year ago.

Interest expense decreased by 24.1% in the current period to $1.5 million from
$1.9 million a year ago due to lower interest rates and lower average
outstanding debt.

Costs and expenses of stock offering of $985,000 related to fees associated
with a contemplated public and private offering of Mercfuel common stock. The
Company was unable to complete the offering and charged the costs to expense
during the quarter ended December 31, 2001. The Company expects to pursue
various financing options with respect to Mercfuel.

Loss on sale of property was $71,000 in the current period and is primarily
related to the sale of real estate located in Miami.

Income tax expense approximated 39% of pre-tax income in both periods
reflecting the expected effective annual tax rate.

Income from discontinued operations was $77,000 in the year ago period net of
income tax benefit of $50,000 and was related to RPAs operations.

Six Months Ended December 31, 2001 compared to December 31, 2000.

Revenues decreased 20.2% to $195.8 million from $245.5 million in the prior
year primarily due to lower fuel prices in the current period. Gross margin
decreased 18.9% to $15.5 million from $19.1 million a year ago primarily due
to declines from Cargo operations and fuel sales. The declines were, in
part, caused by the slow down in the airline industry resulting from the events
of September 11, 2001.

Revenues from fuel sales represented 60.8% of total revenues in the current
period compared to 67.2% of total revenue a year ago. Revenues from fuel sales
decreased 27.8% to $119.1 million from $164.9 million last year. The
decrease in revenues from fuel sales was primarily due to a decrease of 25% in
the price of fuel sold and, to a lesser extent, a
decrease of 3.5% in the volume of fuel sold. The volume decline was, in part,
caused by the slow down in the airline industry resulting from the events of
September 11, 2001. Gross margin from fuel sales decreased 28.2% in the current
period to $3.3 million from $4.5 million a year ago. The decrease in gross
margin from fuel sales was primarily due to lower margins per gallon based on a
change in customer mix.

Revenue from FBOs decreased 6.5% to $47.1 million from $50.4 million a year ago
due to a reduction of approximately 5% each in the price and volume of fuel
sold. Gross margin decreased 6.4% to $7.3 million from $7.8 million in the year
ago period due primarily to the impact the events of September 11, 2001 had on
operations in September 2001.

Revenues from cargo operations decreased 6.6% to
$14.6 million from $15.7 million a year ago. Revenues were lower in cargo handling, brokerage and GSA
due to softness in the marketplace causing a decline in revenues from existing
customers. Gross margin from cargo operations decreased 68.9% to

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$1.2 million from $3.7 million in the year ago period primarily due to lower
revenues and partially due to higher operating costs, primarily lease costs,
associated with cargo handling.

Revenues from government contract services increased 3.1% to $15.0 million from
$14.5 million in the year ago period. The increase in revenues from government
contract services was primarily due to the addition of new contracts during the last twelve months, partially offset by
lower weather and forecasting revenue from fewer contracts and the loss of the
Yokota, Japan contract in September 2001.
The Yokota, Japan contract provided $3.2 million or 21.9% of total revenues for
the six months ended December 31, 2000. Gross margin from government contract
services in the current period increased 22.1% to $3.7 million from $3.1
million last year due to higher margins and higher revenue.

Selling, general and administrative expenses in the current period increased
14% to $4.7 million from $4.1 million in the year ago
period due to settlement
of litigation. See Note 4.

Provision for bad debts decreased 59.3% in the current period to $0.8 million
from $1.9 million in the year ago period due to lower sales in the current
period and lower reserve requirements.

Depreciation and amortization expense was
$4.7 million in both the current period and the prior period.

Interest expense decreased 22.5% in the current six months to $3.0 million from
$3.9 million a year ago due to lower interest rates and lower average
outstanding borrowings.

Costs and expenses of stock offering of $985,000 related to fees associated
with a contemplated public and private offering of Mercfuel common stock. The
Company was unable to complete the offering and charged the costs to expense
during the quarter ended
December 31, 2001. The Company expects to pursue various financing options
with respect to Mercfuel.

Loss on sale of property was $71,000 in the current period and is related to
the sale of real estate in Miami.

Income tax expense approximated 39.0% of pretax income in both periods
reflecting the expected effective annual tax rate.

Liquidity and Capital Resources:

The events of September 11, 2001 had a significant impact on the aviation
industry and, as a result, have impacted the Companys operations as well.
However, at this time, the Companys operations are returning to normal
levels. In view of the uncertainty of the ultimate impact upon the aviation
industry, the long-term impact to the Companys customers and operations
cannot be determined at this time.

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

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assets and liabilities of its Fuel Sales division. On May 16, 2001 and amended
twice thereafter, MercFuel filed a registration statement related to the
proposed sale of 1,200,000 shares of common Stock (the Offering). On April 30, 2001, MercFuel agreed to sell 239,942
shares of common stock in a private placement at a per share price of $4.35.
Due to market conditions, the Company was not able to complete the Offering and
the proceeds of the private placement are expected to be returned. The Company
incurred $985,000 of expenses associated with the proposed offering and private
placement which were expensed in the quarter ending December 31, 2001. The
Company has also elected to withdraw MercFuels application for registration of
its common stock; depending on market conditions and other factors, the Company
may re-file a registration statement at a later point in time. The Company may
pursue various financing options with respect to MercFuel.

Mercury has historically financed its operations primarily through operating
cash flow, bank debt and various public and private placements of bonds and
subordinated debt. Mercurys cash balance at December 31, 2001 was $3,215,000.

Net cash provided by operating activities was $1.7 million for the period ended
December 31, 2001. During this period, the primary sources of net cash
provided by operating activities was income from continuing operations plus
depreciation and amortization totaling $5.5 million, a decrease in accounts
receivable of $8.7 million and a decrease in
inventory of $0.9 million. The primary use of cash from operating activities in
this period was a decrease in accounts payable and accrued expenses and other
current liabilities of $12.2 million and an increase in prepaid expenses and
other current assets of $2.6 million.

Net cash provided by investing activities was $0.4 million during the current
period. During this period, the primary source of cash provided by investing
activities was proceeds from sale of property totaling $2.1 million. The
primary use of cash from investing activities was additions to property,
equipment and leaseholds totaling $2.2 million.

Net cash used in financing activities was $7.1 million during the current
period due to a reduction in long-term debt.

Net cash provided by Discontinued Operations was $4.3 million in the current
period primarily due to the sale of RPA on July 3, 2001.

The Companys senior secured bank credit facility consists of a $35.0 million
Revolver, a term loan with an outstanding balance of $8.9 million at December
31, 2001 and an acquisition facility with an outstanding balance of $17.4
million at December 31, 2001. At December 31, 2001, there was $1.25 million
outstanding under the Revolver. The agreement contains provisions that
require the maintenance of certain financial ratios including minimum tangible
net worth (as defined), minimum profitability levels, maximum leverage and
minimum debt service coverage and quick ratios and limitations on annual
capital expenditures. Additionally, the Company is prohibited from paying
dividends in excess of $400,000 per year. These facilities mature in March
2004.

On September 10, 1999, the Company issued, in a private placement, a $24.0
million senior Subordinated 12% Note (the Note) due 2006 with detachable
warrants to purchase 503,126 shares of the Companys common stock exercisable
at $6.50 per share for seven years. On November 16, 2001, Company agreed to
reduce the exercise price to $5.50 per share. The Note agreement contains

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covenants that, among other matters, limit senior indebtedness, the disposition
of assets and unfunded capital expenditures. The covenants also included a
ratio test for interest coverage, leverage, fixed charge coverage and debt
service. On November 16, 2001 and effective September 30, 2001, the Company
received a waiver pertaining to the interest coverage test and the agreement
was amended by reducing the ongoing interest coverage test.

As a result of the restatement discussed in Note
10, the Company is in noncompliance with the minimum quarterly net
earnings debt covenant contained in the Senior Secured Credit
Facility. The Company is in discussions with the lenders to obtain a
waiver for this debt covenant and until such time as a waiver is
executed, the lenders have the right to provide written notice to the
Company declaring the total obligations associated with the Senior
Secured Credit Facility to be immediately due and payable. If the
Senior Secured Credit Facility lenders provide this notice, the
holders of the Note have the right to provide the Company with
written notice declaring the entire obligations associated with the
Note to be immediately due and payable. Therefore, as of December 31,
2001 the Company has classified the total principal amount
outstanding on the Senior Secured Credit Facility and the Note,
amounting to $27.5 million and $23.1 million as Current portion of
long term debt and Senior Subordinated Note, current, respectively.
The lenders have not exercised this right.

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

In the event that fuel prices increase significantly for an extended period of
time, the Companys liquidity could be adversely affected unless the Company is
able to increase vendor credit or increase lending limits under its revolving
credit facility. The Company believes, however its revolver and vendor credit
should provide it with sufficient liquidity in the event of a major temporary
surge in oil prices.

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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
Vice President Finance
(Principal Financial Officer)

Date:   October 14, 2002

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CERTIFICATIONS

| |  | 
| |  | 

I, Joseph Czyzyk, certify that:



| | 1. |  | I have reviewed this quarterly
report on Form 10-Q/A 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; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.                       

Date: October 14, 2002

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

I, Robert M. Schlax, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q/A 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; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.                       

Date: October 14, 2002

| |  |                                                                      
| |  | ---------------------------------------------------------------------
| |  | /s/ ROBERT M. SCHLAX                                                 
| |  |                                                                      
| |  | Robert M. Schlax
Vice President Finance
(Principal Financial Officer)