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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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 for the quarterly            
|           |  |      |  | period ended December 31, 2002                                      
|           |  |      |  |                                                                     
|           |  | [  ] |  | Transition report pursuant to section 13 or 15(d) of                
|           |  |      |  | the Securities Exchange Act of 1934                                 
|           |  |      |  |                                                                     
|           |  |      |  | For the Transition period from       to                             

Commission File No. 1-7134



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Mercury Air Group, Inc.

(Exact name of registrant as specified in its charter)


|                                         |  |                       
|---------------------------------------- |  | ----------------------
|Delaware                                 |  | 11-1800515            
|(State or other jurisdiction of          |  | (I.R.S. Employer      
|incorporation or organization)           |  | 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 by check mark whether the Registrant is an Accelerated Filer (as
defined by rule 12 (b) 2 of the Securities Exchange Act of 1934.) Yes
[  ] No [X]

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

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



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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 1  Restatement 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 Form 10-Q/A.

2



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TABLE OF CONTENTS



|                               |                                                                                               |  |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Change in Securities                                                                 
|                               | Item 3. Default Upon Senior Securities                                                       
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                               | Item 5. Other Information                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|EX-31.1                       
|EX-31.2                       
|EX-32.1                       
|EX-32.2                       



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PART I  FINANCIAL INFORMATION




Item 1.Financial Statements

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |            |             |             | 
|------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | -------------------------- | ---------- | ---------------------- | ----------- | ----------- | ---------- | ----------- | ----------- | 
|                                                                                                                                           |                                                                                                                                                |              |                            |            | December 31,           |             | June 30,   
|                                                                                                                                           |                                                                                                                                                |              |                            |            | 2002                   |             | 2002       
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |            
|                                                                                                                                           |                                                                                                                                                |              |                            |            | (unaudited)            |             |             |            |            
|                                                                                                                                           |                                                                                                                                                |              |                            |            | (Restated, See Note 1)
|ASSETS                                                                                                                                     |                                                                                                                                                |              |                            |            |                        |             |             |           
|CURRENT ASSETS:                                                                                                                            |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           | Cash and cash equivalents                                                                                                                      |              | $                          | 4,395,000  |                        |             | $           | 5,565,000  |            
|                                                                                                                                           | Restricted cash                                                                                                                                |              |                            |            |                        |             |             | 3,780,000  |            
|                                                                                                                                           | Trade accounts receivable, net of allowance for doubtful
accounts of $2,223,000 at 12/31/02 and $1,583,000 at
6/30/02                          |              |                            | 51,962,000 |                        |             |             | 47,570,000 |            
|                                                                                                                                           | Inventories, principally aviation fuel                                                                                                         |              |                            | 3,983,000  |                        |             |             | 2,985,000  |            
|                                                                                                                                           | Prepaid expenses and other current assets                                                                                                      |              |                            | 3,165,000  |                        |             |             | 3,042,000  |            
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           |                                                                                                                                                |              | TOTAL CURRENT ASSETS       |            |                        | 63,505,000  |             |            |             | 62,942,000  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of accumulated
depreciation and amortization of $57,180,000 at 12/31/02
and $54,383,000 at 6/30/02 |                                                                                                                                                |              | 60,696,000                 |            |                        |             | 61,094,000  |           
|NOTES RECEIVABLE                                                                                                                           |                                                                                                                                                |              | 2,072,000                  |            |                        |             | 2,158,000   |           
|DEFERRED INCOME TAXES                                                                                                                      |                                                                                                                                                |              | 1,299,000                  |            |                        |             | 1,302,000   |           
|GOODWILL                                                                                                                                   |                                                                                                                                                |              | 4,389,000                  |            |                        |             | 4,389,000   |           
|OTHER INTANGIBLE ASSETS                                                                                                                    |                                                                                                                                                |              | 1,183,000                  |            |                        |             | 233,000     |           
|OTHER ASSETS                                                                                                                               |                                                                                                                                                |              | 5,766,000                  |            |                        |             | 4,096,000   |           
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           |                                                                                                                                                | TOTAL ASSETS |                            | $          | 138,910,000            |             |             | $          | 136,214,000 |            
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       |                                                                                                                                                |              |                            |            |                        |             |             |           
|CURRENT LIABILITIES:                                                                                                                       |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           | Accounts payable                                                                                                                               |              | $                          | 35,526,000 |                        |             | $           | 35,449,000 |            
|                                                                                                                                           | Accrued expenses and other current liabilities                                                                                                 |              |                            | 6,995,000  |                        |             |             | 8,861,000  |            
|                                                                                                                                           | Current portion of long-term debt                                                                                                              |              |                            | 4,325,000  |                        |             |             | 14,677,000 |            
|                                                                                                                                           | Senior subordinated note, current                                                                                                              |              |                            |            |                        |             |             | 23,179,000 |            
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |            |            
|                                                                                                                                           |                                                                                                                                                |              | TOTAL CURRENT LIABILITIES  |            |                        | 46,846,000  |             |            |             | 82,166,000  | 
|LONG-TERM DEBT                                                                                                                             |                                                                                                                                                |              | 32,306,000                 |            |                        |             | 17,516,000  |           
|SENIOR SUBORDINATED NOTE                                                                                                                   |                                                                                                                                                |              | 23,355,000                 |            |                        |             |             |           
|DEFERRED INCOME TAXES                                                                                                                      |                                                                                                                                                |              | 169,000                    |            |                        |             | 169,000     |           
|DEFERRED RENT                                                                                                                              |                                                                                                                                                |              | 2,200,000                  |            |                        |             | 1,943,000   |           
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           |                                                                                                                                                |              | TOTAL LIABILITIES          |            |                        | 104,876,000 |             |            |             | 101,794,000 | 
|MANDATORILY REDEEMABLE PREFERRED STOCK, Series A  $.01 par value;
authorized 1,000,000 shares;
outstanding 462,627 shares at 12/31/02     |                                                                                                                                                |              | 463,000                    |            |                        |             |             |           
|STOCKHOLDERS EQUITY:                                                                                                                      |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           | Preferred Stock  $.01 par value; authorized 2,000,000
shares; none outstanding                                                                |              |                            |            |                        |             |             |            |            
|                                                                                                                                           | Common Stock  $ .01 par value; authorized 18,000,000
shares; outstanding 6,577,334 and 6,541,699 shares at 12/31/02 and
6/30/02, respectively |              |                            | 65,000     |                        |             |             | 66,000     |            
|                                                                                                                                           | Additional paid-in capital                                                                                                                     |              |                            | 22,449,000 |                        |             |             | 22,233,000 |            
|                                                                                                                                           | Retained earnings                                                                                                                              |              |                            | 15,651,000 |                        |             |             | 16,872,000 |            
|                                                                                                                                           | Accumulated other comprehensive loss                                                                                                           |              |                            | (361,000   | )                      |             |             | (316,000   | )          
|                                                                                                                                           | Notes receivable from officers                                                                                                                 |              |                            | (4,233,000 | )                      |             |             | (4,435,000 | )          
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           |                                                                                                                                                |              | TOTAL STOCKHOLDERS EQUITY |            |                        | 33,571,000  |             |            |             | 34,420,000  | 
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |           
|                                                                                                                                           |                                                                                                                                                | $            | 138,910,000                |            |                        | $           | 136,214,000 |           
|                                                                                                                                           |                                                                                                                                                |              |                            |            |                        |             |             |            |            

See accompanying notes to consolidated financial statements

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |      |           | 
|------------------------------------------------------------------------------- | ------------------------------------ | --------------------------------- | ------------------------------------------------------ | ----------- | ---------------------- | ---------- | ------------------ | ----------- | ----- | ---------- | ---------------------- | ---------- | ----- | --------- | ---------- | ---------- | ---- | --------- | 
|                                                                                |                                      |                                   |                                                        |             | Six Months Ended       |            | Three Months Ended
|                                                                                |                                      |                                   |                                                        |             | December 31,           |            | December 31,      
|                                                                                |                                      |                                   |                                                        |             |                        |            |                   
|                                                                                |                                      |                                   |                                                        |             | 2002                   |            | 2001               |             | 2002  |            | 2001                  
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                       
|                                                                                |                                      |                                   |                                                        |             | (Restated, See Note 1) |            |                    |             |       |            | (Restated, See Note 1) |            |       |           |           
|Sales and revenues:                                                             |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                | Sales                                |                                   | $                                                      | 175,336,000 |                        |            | $                  | 149,902,000 |       |            | $                      | 89,886,000 |       |           | $          | 69,459,000 |     
|                                                                                | Service revenues                     |                                   |                                                        | 46,521,000  |                        |            |                    | 45,941,000  |       |            |                        | 24,076,000 |       |           |            | 22,632,000 |     
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                |                                      |                                   | 221,857,000                                            |             |                        |            | 195,843,000        |             |       |            | 113,962,000            |            |       |           | 92,091,000 |           
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|Costs and expenses:                                                             |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                | Cost of sales                        |                                   |                                                        | 156,247,000 |                        |            |                    | 129,383,000 |       |            |                        | 80,213,000 |       |           |            | 59,094,000 |     
|                                                                                | Operating expenses                   |                                   |                                                        | 52,772,000  |                        |            |                    | 50,932,000  |       |            |                        | 26,861,000 |       |           |            | 25,193,000 |     
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                |                                      |                                   | 209,019,000                                            |             |                        |            | 180,315,000        |             |       |            | 107,074,000            |            |       |           | 84,287,000 |           
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                |                                      |                                   | Gross margin (excluding
depreciation and
amortization) |             |                        | 12,838,000 |                    |             |       | 15,528,000 |                        |            |       | 6,888,000 |            |            |      | 7,804,000 | 
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|Expenses (income):                                                              |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                | Selling, general and
administrative  |                                   |                                                        | 5,241,000   |                        |            |                    | 4,738,000   |       |            |                        | 2,651,000  |       |           |            | 2,778,000  |     
|                                                                                | Provision for bad debts              |                                   |                                                        | 759,000     |                        |            |                    | 772,000     |       |            |                        | 407,000    |       |           |            | 187,000    |     
|                                                                                | Depreciation and amortization        |                                   |                                                        | 4,049,000   |                        |            |                    | 4,684,000   |       |            |                        | 1,998,000  |       |           |            | 2,380,000  |     
|                                                                                | Interest expense                     |                                   |                                                        | 2,915,000   |                        |            |                    | 2,991,000   |       |            |                        | 1,531,000  |       |           |            | 1,465,000  |     
|                                                                                | Costs and expenses of stock
offering |                                   |                                                        |             |                        |            |                    | 985,000     |       |            |                        |            |       |           |            | 985,000    |     
|                                                                                | Loss on sale of property             |                                   |                                                        |             |                        |            |                    | 71,000      |       |            |                        |            |       |           |            | 71,000     |     
|                                                                                | Debt extinguishments costs           |                                   |                                                        | 1,733,000   |                        |            |                    |             |       |            |                        | 1,208,000  |       |           |            |            |     
|                                                                                | Interest income                      |                                   |                                                        | (50,000     | )                      |            |                    | (28,000     | )     |            |                        | 2,000      |       |           |            | (11,000    | )   
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                |                                      |                                   | 14,647,000                                             |             |                        |            | 14,213,000         |             |       |            | 7,797,000              |            |       |           | 7,855,000  |           
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|Income (loss) from continuing
operations before provision for
income taxes      |                                      |                                   | (1,809,000                                             | )           |                        |            | 1,315,000          |             |       |            | (909,000               | )          |       |           | (51,000    | )         
|Income tax provision
(benefit)                                                  |                                      |                                   | (624,000                                               | )           |                        |            | 506,000            |             |       |            | (313,000               | )          |       |           | (20,000    | )         
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|Income (loss) from continuing
operations                                        |                                      |                                   | (1,185,000                                             | )           |                        |            | 809,000            |             |       |            | (596,000               | )          |       |           | (31,000    | )         
|Loss from discontinued operations, net
of income tax benefit of $27,000 in
2001 |                                      |                                   |                                                        |             |                        |            | (42,000            | )           |       |            |                        |            |       |           |            |           
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|Net income (loss)                                                               |                                      | $                                 | (1,185,000                                             | )           |                        | $          | 767,000            |             |       | $          | (596,000               | )          |       | $         | (31,000    | )         
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|Net income (loss) per common share:                                             |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |           
|                                                                                | Basic:                               |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|                                                                                |                                      | From continuing operations        |                                                        | $           | (0.18                  | )          |                    | $           | 0.12  |            |                        | $          | (0.09 | )         |            | $          | 0.00 |          
|                                                                                |                                      | Loss from discontinued
operations |                                                        |             |                        |            |                    |             | (0.01 | )          |                        |            |       |           |            |            |      |          
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|                                                                                |                                      | Net Income (loss)                 |                                                        | $           | (0.18                  | )          |                    | $           | 0.11  |            |                        | $          | (0.09 | )         |            | $          | 0.00 |          
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|                                                                                | Diluted:                             |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|                                                                                |                                      | From continuing operations        |                                                        | $           | (0.18                  | )          |                    | $           | 0.12  |            |                        | $          | (0.09 | )         |            | $          | 0.00 |          
|                                                                                |                                      | Loss from discontinued
operations |                                                        |             |                        |            |                    |             | (0.01 | )          |                        |            |       |           |            |            |      |          
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     
|                                                                                |                                      | Net income (loss)                 |                                                        | $           | (0.18                  | )          |                    | $           | 0.11  |            |                        | $          | (0.09 | )         |            | $          | 0.00 |          
|                                                                                |                                      |                                   |                                                        |             |                        |            |                    |             |       |            |                        |            |       |           |            |            |     

See accompanying notes to consolidated financial statements

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |            |             |   |            |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------------------- | ---------- | ----------------------------------------------------- | ---------- | ---------------------- | ---------- | ---------- | ----------- | - | ---------- | -
|                                                                                |                                                            |                                                                |            |                                                       |            | Six Months Ended      
|                                                                                |                                                            |                                                                |            |                                                       |            | December 31,          
|                                                                                |                                                            |                                                                |            |                                                       |            |                       
|                                                                                |                                                            |                                                                |            |                                                       |            | 2002                   |            | 2001      
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                |                                                            |                                                                |            |                                                       |            | (Restated, See Note 1) |            |            |             |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                | Net income (loss)                                          |                                                                | $          | (1,185,000                                            | )          |                        | $          | 767,000    |            
|                                                                                | Add: Loss from discontinued operations                     |                                                                |            |                                                       |            |                        |            | 42,000     |            
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |            |            
|                                                                                | Income (loss) from continuing operations                   |                                                                |            | (1,185,000                                            | )          |                        |            | 809,000    |            
|                                                                                | Adjustments to derive cash flow from operating activities: |                                                                |            |                                                       |            |                        |            |            |            
|                                                                                |                                                            | Bad debt expense                                               |            |                                                       | 759,000    |                        |            |            | 772,000     |  
|                                                                                |                                                            | Depreciation and amortization                                  |            |                                                       | 4,049,000  |                        |            |            | 4,684,000   |  
|                                                                                |                                                            | Deferred income taxes                                          |            |                                                       | 3,000      |                        |            |            | 21,000      |  
|                                                                                |                                                            | Deferred rent                                                  |            |                                                       | 257,000    |                        |            |            | 295,000     |  
|                                                                                |                                                            | Compensation expense related to remeasurement of stock options |            |                                                       | 318,000    |                        |            |            | 12,000      |  
|                                                                                |                                                            | Expense related to amortization of executive stock plan        |            |                                                       | 202,000    |                        |            |            |             |  
|                                                                                |                                                            | Amortization of senior subordinated note discount              |            |                                                       | 176,000    |                        |            |            | 93,000      |  
|                                                                                |                                                            | Management compensation paid in preferred stock                |            |                                                       | 204,000    |                        |            |            |             |  
|                                                                                |                                                            | Management compensation applied to exercise of stock options   |            |                                                       | 174,000    |                        |            |            |             |  
|                                                                                |                                                            | Loss on retirement/ sale of assets                             |            |                                                       | 27,000     |                        |            |            | 71,000      |  
|                                                                                |                                                            | Write off of capitalized financing costs                       |            |                                                       | 1,733,000  |                        |            |            |             |  
|                                                                                |                                                            | Amortization of deferred gain                                  |            |                                                       |            |                        |            |            |             |  
|                                                                                |                                                            | Changes in operating assets and liabilities:                   |            |                                                       |            |                        |            |            |             |  
|                                                                                |                                                            | Trade and other accounts receivable                            |            |                                                       | (5,151,000 | )                      |            |            | 8,696,000   |  
|                                                                                |                                                            | Inventories                                                    |            |                                                       | (998,000   | )                      |            |            | 933,000     |  
|                                                                                |                                                            | Prepaid expenses and other current assets                      |            |                                                       | (123,000   | )                      |            |            | (2,564,000  | )
|                                                                                |                                                            | Accounts payable                                               |            |                                                       | 76,000     |                        |            |            | (10,656,000 | )
|                                                                                |                                                            | Accrued expenses and other current liabilities                 |            |                                                       | (1,866,000 | )                      |            |            | (1,419,000  | )
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                |                                                            |                                                                |            | Net cash provided by (used in) operating activities   |            |                        | (1,345,000 | )          |             |   | 1,747,000  |  
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                | Decrease in restricted cash                                |                                                                |            | 3,780,000                                             |            |                        |            |            |            
|                                                                                | (Increase) decrease in other assets                        |                                                                |            | (1,164,000                                            | )          |                        |            | 732,000    |            
|                                                                                | (Increase) decrease in notes receivables                   |                                                                |            | 86,000                                                |            |                        |            | (274,000   | )          
|                                                                                | Proceeds from sale of property                             |                                                                |            | 35,000                                                |            |                        |            | 2,078,000  |            
|                                                                                | Additions to property, equipment and leaseholds            |                                                                |            | (3,551,000                                            | )          |                        |            | (2,169,000 | )          
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                |                                                            |                                                                |            | Net cash provided by ( used in ) investing activities |            |                        | (814,000   | )          |             |   | 367,000    |  
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                | Proceeds from revolving credit facility                    |                                                                |            | 12,775,000                                            |            |                        |            |            |            
|                                                                                | Reduction of debt instruments                              |                                                                |            | (11,975,000                                           | )          |                        |            | (7,081,000 | )          
|                                                                                | Early retirement of debt                                   |                                                                |            | (13,285,000                                           | )          |                        |            |            |            
|                                                                                | Proceeds from refinancing                                  |                                                                |            | 16,923,000                                            |            |                        |            |            |            
|                                                                                | Capitalization of deferred financing cost                  |                                                                |            | (3,351,000                                            | )          |                        |            |            |            
|                                                                                | Repurchase of common stock                                 |                                                                |            | (370,000                                              | )          |                        |            |            |            
|                                                                                | Proceeds from issuance of preferred stock                  |                                                                |            | 259,000                                               |            |                        |            |            |            
|                                                                                | Proceeds from exercise of stock options                    |                                                                |            | 58,000                                                |            |                        |            |            |            
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |            |            
|                                                                                |                                                            |                                                                |            | Net cash provided by (used in) financing activities   |            |                        | 1,034,000  |            |             |   | (7,081,000 | )
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|Effect of exchange rate changes on cash                                         |                                                            |                                                                | (45,000    | )                                                     |            |                        |            |           
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS |                                                            |                                                                | (1,170,000 | )                                                     |            |                        | 4,967,000  |           
|NET CASH PROVIDED BY DISCONTINUED OPERATIONS                                    |                                                            |                                                                |            |                                                       |            |                        | 4,296,000  |           
|CASH AND CASH EQUIVALENTS, beginning of period                                  |                                                            |                                                                | 5,565,000  |                                                       |            |                        | 3,886,000  |           
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |            |            
|CASH AND CASH EQUIVALENTS, end of period                                        |                                                            | $                                                              | 4,395,000  |                                                       |            | $                      | 3,215,000  |           
|                                                                                |                                                            |                                                                |            |                                                       |            |                        |            |            |            
|CASH PAID DURING THE PERIOD FOR:                                                |                                                            |                                                                |            |                                                       |            |                        |            |           
|                                                                                | Interest                                                   |                                                                | $          | 2,630,000                                             |            |                        | $          | 2,943,000  |            
|                                                                                | Income taxes                                               |                                                                | $          | 4,670,000                                             |            |                        | $          | 348,000    |            

See accompanying notes to consolidated financial statements

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MERCURY AIR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(Unaudited)

Note 1  General

Business

Mercury Air Group, Inc. (the Company), a Delaware Corporation, was
organized in 1956 and provides a broad range of services to the aviation
industry through four principal operating units: fixed base operations, cargo
operations, fuel sales, and government contract services. Fixed base operations
(FBOs) include fuel sales, into-plane services, ground support services,
aircraft hangar and tie-down facilities and maintenance at certain locations
for commercial, private, general aviation and military aircraft. Cargo
operations consist of cargo handling, space logistics operations and general
cargo sales agent services. Fuel sales include the sale of fuel and delivery of
fuel primarily to domestic and international commercial airlines, business
aviation and air freight airlines. Government contract services consist of
aircraft refueling and fuel storage operations, base operating support (BOS)
services, air terminal and ground handling services and weather observation and
forecasting services performed principally for agencies of the United States
Government. Additionally, the Company had a fifth operating unit, RPA Airline
Automation Services, Inc. (RPA) which was sold on July 3, 2001 and is
classified as a discontinued operation. (See Note 2).

Restatement

The consolidated balance sheets as of December 31 and June 30, 2002 and
the consolidated statements of operations and cash flows for the three-month
and six-month periods ended December 31, 2002 have been restated
related to the following items: (1) To record as of June 30, 2002 an accrual of
$459,000 (representing increased rent expense of $789,000 net of retroactive
recoverable sublease rental income of $330,000) and to accrue
$115,000 and $230,000 for the three and six-month periods ended
December 31, 2002, respectively, for a rent increase related to
one of Air Cargos warehouse facilities at Los Angeles International Airport
which is retroactive to June 18, 2001. The Company had previously recognized no
accrual for this retroactive rent increase in its fiscal 2002 financial
statements, as the Company was disputing the amount of the increase; however,
the Company subsequently determined that it had received information regarding
the proposed rent increase prior to the issuance of its fiscal 2002 financial
statements which provided substantial evidence that an obligation existed at
the balance sheet date and that the amount of the liability could be reasonably
estimated; (2) To record additional
compensation expense of $430,000 during the fourth quarter of fiscal 2002 in
connection with the 2002 Management Stock Purchase Plan, pursuant to which the
Company had loaned certain officers in May 2002 a total of $3.9 million to
purchase shares of the Companys stock from CFK Partners (which is owned by
three of the Companys directors) at $7.50 per share. The trading price of the
shares at this time was $4.90 per share. A full recourse loan was made to the
Companys Chief Executive Officer in the amount of $2.9 million, and
non-recourse loans totaling $1 million were made to the other executives
(Other Executives). The Company originally recorded a compensation charge of
$356,000 in connection with this transaction to write-down the non-recourse
loans based on the difference between the purchase price paid by the Other
Executives for the shares and the market value of such shares at that time. The
Company has determined that it was proper to record the compensation expense of
$356,000 to reflect the benefit received by CFK Partners for the purchase price
paid by the Other Executives in excess of the market value of such shares at
that time; however, the non-recourse loans should not have been written-down,
but rather additional paid-in capital should have been credited for $356,000.
In addition, the Company determined that it should have recorded additional
compensation expense of $436,000 related to the recourse loan and the shares
purchased by the CEO to also reflect the benefit received by CFK Partners
related to the purchase price paid by the CEO for his shares in excess of the
market value of such shares at that time. The benefit attributed to the CEOs
interest in CFK Partners has been deducted in determining the compensation
expense related to these loans. Accordingly, the fiscal 2002 financial
statements have been restated to record in the fourth quarter of fiscal 2002
the reversal of the write-down of the non-recourse loans and a credit to
additional paid-in capital for $356,000, and to record additional compensation
expense of $436,000. The non-recourse loans are being accounted for as a
variable stock plan pursuant to Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and the recourse loan is being
accounted for as a fixed stock plan; (3) To reverse the sale-leaseback
accounting associated with the sale of a building housing the Companys
corporate headquarters and accounting for this transaction as a financing
effective January 2002. The Company sold the corporate headquarters to CFK
Realty Partners, LLC (CFK Realty), a wholly owned subsidiary of CFK Partners,
and concurrently entered into a ten-year lease of the property. However, the
Company has determined that CFK Realty was not sufficiently capitalized to
permit sale-leaseback accounting and the non-consolidation of CFK Realty.
Accordingly, the fiscal 2002

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financial statements have been restated to fully consolidate CFK Realty
effective in the third quarter of fiscal 2002, resulting in land and building
totaling $1.8 million, net of accumulated depreciation, being reinstated on the
books of the Company, recording of debt related to a loan of $3.2 million
incurred by CFK Realty to finance the acquisition, reversal of a deferred gain
of $2.1 million recorded by the Company at the time of the transaction, and the
reversal of rent expense and recording of depreciation resulting in additional
pre-tax expense of $23,000 for the third and fourth quarters of fiscal 2002
combined; and (4) to adjust opening retained earnings by $363,000 to correct
for income tax adjustments that should have been recorded in years prior to
fiscal 2001.

The accompanying restated financial statements for the three-month and
six-month periods ended December 31, 2002, resulted in an
increase in the previously reported net loss of $106,000 and $213,000 and an
increase in the net loss per basic and diluted share of $0.01 and $0.03,
respectively.

The following tables represent the impact of the restatement on balances
as reported, and as restated for all periods presented:

CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                   |                                            |        |             |                   |  |                   |        |         |  | 
|------------------------------------------------ | ----------------------------------------------------------------- | ------------------------------------------ | ------ | ----------- | ----------------- |  | ----------------- | ------ | ------- |  | 
|                                                 |                                                                   |                                            |        |             | December 31, 2002 |  | December 31, 2002
|                                                 |                                                                   | As Reported                                |        | As Restated
|                                                 |                                                                   |                                            |        |            
|                                                 |                                                                   |                                            |        |             | (In Thousands)    |  | (In Thousands)   
|                                                 |                                                                   |                                            | ASSETS |             |                   |  |                   |        |         |  | 
|CURRENT ASSETS:                                  |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 | Cash and cash equivalents                                         |                                            | $      | 4,377       |                   |  | $                 | 4,395  |        
|                                                 | Trade accounts receivable, net of allowance for doubtful accounts |                                            |        | 51,297      |                   |  |                   | 51,962 |        
|                                                 | Inventories, principally aviation fuel                            |                                            |        | 3,983       |                   |  |                   | 3,983  |        
|                                                 | Prepaid expenses and other current assets                         |                                            |        | 3,235       |                   |  |                   | 3,165  |        
|                                                 | Notes receivable from affiliate                                   |                                            |        | 1,400       |                   |  |                   |        |        
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL CURRENT ASSETS                       |        |             | 64,292            |  |                   |        | 63,505  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, NET          |                                                                   |                                            | 58,933 |             |                   |  | 60,696            |       
|NOTES RECEIVABLE, net of allowance for doubtful  |                                                                   |                                            | 2,072  |             |                   |  | 2,072             |       
|DEFERRED INCOME TAXES                            |                                                                   |                                            | 764    |             |                   |  | 1,299             |       
|GOODWILL                                         |                                                                   |                                            | 4,389  |             |                   |  | 4,389             |       
|OTHER INTANGIBLE ASSETS, NET                     |                                                                   |                                            | 1,183  |             |                   |  | 1,183             |       
|OTHER ASSETS, NET                                |                                                                   |                                            | 5,766  |             |                   |  | 5,766             |       
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL ASSETS                               |        | $           | 137,399           |  |                   | $      | 138,910 | 
|                                                 |                                                                   |                                            |        |             |                   |  |                   |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY             |                                                                   |                                            |        |             |                   |  |                   |       
|CURRENT LIABILITIES:                             |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 | Accounts payable                                                  |                                            | $      | 35,162      |                   |  | $                 | 35,526 |        
|                                                 | Accrued expenses and other current liabilities                    |                                            |        | 6,363       |                   |  |                   | 6,995  |        
|                                                 | Current portion of long-term debt                                 |                                            |        | 4,325       |                   |  |                   | 4,325  |        
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL CURRENT LIABILITIES                  |        |             | 45,850            |  |                   |        | 46,846  | 
|LONG-TERM DEBT                                   |                                                                   |                                            | 29,178 |             |                   |  | 32,306            |       
|SENIOR SUBORDINATED NOTES                        |                                                                   |                                            | 23,355 |             |                   |  | 23,355            |       
|DEFERRED GAIN                                    |                                                                   |                                            | 2,106  |             |                   |  |                   |       
|DEFERRED INCOME TAXES                            |                                                                   |                                            |        |             |                   |  | 169               |       
|DEFERRED RENT                                    |                                                                   |                                            | 2,200  |             |                   |  | 2,200             |       
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL LIABILITIES                          |        |             | 102,689           |  |                   |        | 104,876 | 
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|MANDATORILY REDEEMABLE PREFERRED STOCK, Series A |                                                                   |                                            | 463    |             |                   |  | 463               |       
|STOCKHOLDERS EQUITY:                            |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 | Common stock                                                      |                                            |        | 65          |                   |  |                   | 65     |        
|                                                 | Additional paid-in capital                                        |                                            |        | 21,634      |                   |  |                   | 22,449 |        
|                                                 | Retained earnings                                                 |                                            |        | 16,743      |                   |  |                   | 15,651 |        
|                                                 | Accumulated other comprehensive loss                              |                                            |        | (361        | )                 |  |                   | (361   | )      
|                                                 | Notes receivable from officers                                    |                                            |        | (3,834      | )                 |  |                   | (4,233 | )      
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL STOCKHOLDERS EQUITY                 |        |             | 34,247            |  |                   |        | 33,571  | 
|                                                 |                                                                   |                                            |        |             |                   |  |                   |       
|                                                 |                                                                   | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |        | $           | 137,399           |  |                   | $      | 138,910 | 
|                                                 |                                                                   |                                            |        |             |                   |  |                   |        |        

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CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |       |   |       | 
|---------------------------------------------------------------------------- | ------------------ | -------------- | ----------------------------------- | -------------- | ------------------------ | ----- | -------------------------- | ----- | ---------- | ----- | -------- | ----- | - | ----- | ------- | ----- | - | ----- | 
|                                                                             |                    |                |                                     |                | For the Six Months Ended |       | For the Three Months Ended
|                                                                             |                    |                |                                     |                | December 31, 2002        |       | December 31, 2002         
|                                                                             |                    | (In Thousands) |                                     | (In Thousands)
|                                                                             |                    |                |                                     |               
|                                                                             |                    |                |                                     |                | As                       |       |                            |       |            |       | As       |       |   |       |        
|                                                                             |                    |                |                                     |                | Previously               |       | As                         |       | Previously |       | As      
|                                                                             |                    |                |                                     |                | Reported                 |       | Restated                   |       | Reported   |       | Restated
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |         
|Sales and revenues                                                           |                    | $              | 221,857                             |                |                          | $     | 221,857                    |       |            | $     | 113,962  |       |   | $     | 113,962 |      
|Cost and expenses:                                                           |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Cost of sales                                                                |                    |                | 156,247                             |                |                          |       | 156,247                    |       |            |       | 80,213   |       |   |       | 80,213  |      
|Operating expenses                                                           |                    |                | 52,542                              |                |                          |       | 52,772                     |       |            |       | 26,746   |       |   |       | 26,861  |      
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Total costs and expenses                                                     |                    |                | 208,789                             |                |                          |       | 209,019                    |       |            |       | 106,959  |       |   |       | 107,074 |      
|Gross margin (excluding depreciation
and amortization)                       |                    |                | 13,068                              |                |                          |       | 12,838                     |       |            |       | 7,003    |       |   |       | 6,888   |      
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Expenses:                                                                    |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|                                                                             |                    |                | Selling, general and administrative |                |                          | 5,459 |                            |       |            | 5,241 |          |       |   | 2,760 |         |       |   | 2,651 | 
|                                                                             |                    |                | Provision for bad debts             |                |                          | 759   |                            |       |            | 759   |          |       |   | 407   |         |       |   | 407   | 
|                                                                             |                    |                | Depreciation and amortization       |                |                          | 4,004 |                            |       |            | 4,049 |          |       |   | 1,975 |         |       |   | 1,998 | 
|                                                                             |                    |                | Interest expense                    |                |                          | 2,791 |                            |       |            | 2,915 |          |       |   | 1,471 |         |       |   | 1,531 | 
|                                                                             |                    |                | Debt extinguishments cost           |                |                          | 1,733 |                            |       |            | 1,733 |          |       |   | 1,208 |         |       |   | 1,208 | 
|                                                                             |                    |                | Interest income                     |                |                          | (85   | )                          |       |            | (50   | )        |       |   | (15   | )       |       |   | 2     | 
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Total expenses                                                               |                    |                | 14,661                              |                |                          |       | 14,647                     |       |            |       | 7,806    |       |   |       | 7,797   |      
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Income (loss) from continuing operations before income
tax provision benefit |                    |                | (1,593                              | )              |                          |       | (1,809                     | )     |            |       | (803     | )     |   |       | (909    | )    
|Income tax provision (benefit)                                               |                    |                | (621                                | )              |                          |       | (624                       | )     |            |       | (313     | )     |   |       | (313    | )    
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Net income (loss)                                                            |                    | $              | (972                                | )              |                          | $     | (1,185                     | )     |            | $     | (490     | )     |   | $     | (596    | )    
|                                                                             |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|Net loss per common share:                                                   |                    |                |                                     |                |                          |       |                            |       |            |       |          |       |   |       |         |      
|                                                                             | Net loss  basic   |                | $                                   | (0.15          | )                        |       | $                          | (0.18 | )          |       | $        | (0.08 | ) |       | $       | (0.09 | )
|                                                                             | Net loss  diluted |                | $                                   | (0.15          | )                        |       | $                          | (0.18 | )          |       | $        | (0.08 | ) |       | $       | (0.09 | )

Risks and Uncertainties

The $24.0 million Senior Subordinated 12% Note (the Note) contains
provisions that provide incentives to prepay the principal of the Note. If the
entire principal of the Note is not prepaid by December 31, 2003, the Note
Holder will be entitled to stock warrants equivalent to 5% of the outstanding
shares of common stock then outstanding, for nominal consideration. If the
principal amount of the Note is in excess of $12.0 million on December 31,
2003, the Note Holder will be entitled to receive stock warrants equivalent to
an additional 5% of the number of shares of common stock outstanding at that
date, for nominal consideration, along with an additional note with a principal
amount of $5.0 million. The Company is assessing various options to prepay the
principal of the Note by December 31, 2003 but if the Company does not prepay
at least $12.0 million in principal on the Note by December 31, 2003, the
consideration due the Note Holder at that time will adversely affect the
Companys financial position and may have a negative effect on its ability to
meet its financial obligations.

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

In April 2002, the Company received a notice from Los Angeles World
Airports (LAWA) of a proposed rent increase for one of Air Cargos warehouse
facilities at LAX (the Avion Warehouse) retroactive to June 18, 2001. In
response to this notice, the Company submitted protests to the LAWA Staff and
Board of Commissioners regarding the proposed increase on the basis that: 1)
the Company had made a substantial investment in the warehouse facility and the
proposed rental increase would greatly reduce the

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Companys ability to achieve
an acceptable rate of return on the Companys investment to date; 2) if any
increase is to be made, it should be determined based on the Company being a
developer of the facility and not strictly a tenant; and 3) that the amount of
the proposed increase is not justified given the general business environment
of the air cargo handling operations. In response to the Companys protests to
the proposed increase, in September 2002 the Company received a revised notice
from LAWA of a reduced proposal for a rental increase for the Avion Warehouse.
The LAWA Staff intend to present their recommended rental increase to the LAWA
Board of Commissioners for approval in late January 2004. From June 18, 2001
through June 30, 2002, the accumulated amount of the retroactive rent increase
is $789,000, which will be partially offset by recoverable retroactive sublease
rental income of $330,000. The LAWA Staff has indicated that the retroactive
portion of the rent increase would be payable by the Company in equal monthly
installments over the remaining term of the lease agreement, which is scheduled
to expire in June 2006. The proposed increase in the monthly rent, on a
go-forward basis, would be $64,600, or 35%, from the existing monthly rent. The
Company has accrued $459,000 for the retroactive rent increase, which is net of
increased recoverable retroactive sublease rental income, as of June 30, 2002,
and has accrued an additional $115,000 and $230,000 for the three and
six-month periods ended December 31, 2002, respectively,
resulting in a total accrual of $689,000 as of December 31, 2002. See the
discussion above in this Note 1 under Restatement regarding the restatement
of the financial statements.

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

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

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, 2002 and
the notes thereto. The results of operations for the three months and six
months ended December 31, 2002 are not necessarily indicative of results for
the full year.

New Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB
Statement No. 123. This statement amends SFAS No. 123
Accounting for Stock Based Compensation to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both the annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The Company adopted the disclosure provisions beginning with
the Companys quarter ended December 31, 2002. The Company has no current
intention to change its policy of accounting for stock-based compensation.

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

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assets be reviewed as of the date of adoption to determine if they continue to
qualify as intangible assets under the criteria established under SFAS No. 141,
BusinessCombinations, and to the extent previously recorded intangible assets
do not meet the criteria that they be reclassified to goodwill.

In the quarter ended December 31, 2002, with the assistance of an
independent valuation firm, the Company completed step one of the transitional
test to determine whether there was a potential impairment of goodwill at July
1, 2002. Primarily based on a weighted value using a market approach and an
income approach, it was determined that the fair values of the reporting units
that have goodwill exceeded their carrying values, therefore a step two
impairment test is not required. In accordance with SFAS No. 142, the Company
will perform an impairment test annually to determine whether any impairment
has occurred requiring a pre-tax charge to operating income.

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

|                                             |  |                |            |                |  |                |         |                |  |   |          |   |  |   |         |  
|-------------------------------------------- |  | -------------- | ---------- | -------------- |  | -------------- | ------- | -------------- |  | - | -------- | - |  | - | ------- | -
|                                             |  | Six Months     |            | Six Months     |  | Three Months   |         | Three Months  
|                                             |  | Ended 12/31/02 |            | Ended 12/31/01 |  | Ended 12/31/02 |         | Ended 12/31/01
|                                             |  |                |            |                |  |                |         |               
|Net
income (loss) as reported                |  | $              | (1,185,000 | )              |  | $              | 767,000 |                |  | $ | (596,000 | ) |  | $ | (31,000 | )
|Goodwill amortization                        |  |                |            |                |  |                | 184,000 |                |  |   |          |   |  |   | 92,000  |  
|                                             |  |                |            |                |  |                |         |                |  |   |          |   |  |   |         |  
|Net income (loss) as adjusted                |  | $              | (1,185,000 | )              |  | $              | 951,000 |                |  | $ | (596,000 | ) |  | $ | 61,000  |  
|                                             |  |                |            |                |  |                |         |                |  |   |          |   |  |   |         |  
|Diluted income (loss) per
share, as adjusted |  | $              | (0.18      | )              |  | $              | 0.14    |                |  | $ | (0.09    | ) |  | $ | 0.01    |  
|Diluted income (loss) per
share, as reported |  | $              | (0.18      | )              |  | $              | 0.11    |                |  | $ | (0.09    | ) |  | $ | 0.00    |  

The Company had $1,183,000 and $233,000 of intangible assets, net at
December 31, 2002 and June 30, 2002, respectively. Accumulated amortization for
intangible assets was $817,000 and $767,000 at December 31, 2002 and June 30,
2002, respectively. Intangible assets at December 31, 2002 consist of covenants
not to compete agreements and fuel sales contracts amortized over 3-5 years.
Amortization expense for intangible assets was $50,000 and $150,000 for the six
months ended December 31, 2002 and the year ended June 30, 2002. Estimated
amortization expense in each of the next five years is as follows: $150,000 in
the remainder of 2003; $300,000 in 2004; $233,000 in 2005; $200,000 in 2006;
$200,000 in 2007; and $100,000 thereafter.

Included in Property, Equipment and Leaseholds are leasehold interests
relating to the unallocated purchase costs of certain FBO locations. The
capitalized value of these leasehold interests was $16,257,000 at December 31,
2002 and June 30, 2002. Accumulated depreciation of the leasehold interests was
$5,954,000 and $5,434,000 at December 31, 2002 and June 30, 2002, respectively.
Estimated depreciation expense in each of the next five years is as follows:
$520,000 in the remainder of 2003; $1,041,000 in 2004; $1,011,000 in 2005;
$1,001,000 in 2006; 918,000 in 2007: and $5,813,000 thereafter.

Effective July 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This new statement also supersedes
certain aspects of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
with regard to reporting the effects of a disposal of a 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 previously required by APB Opinion No. 30). In
addition, more dispositions may qualify for discontinued operations treatment.
The adoption of SFAS No. 144 did not have a material effect on the Companys
consolidated financial position or results of operations.

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

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires that cost
associated with an exit or disposal activity be recognized when incurred as
opposed to an entitys commitment to an exit plan as previously allowed. The
provisions of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company adopted SFAS No. 146 on
January 1, 2003. The adoption of this statement did not affect the Companys
consolidated financial position or results of operations.

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In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). This interpretation
elaborates on disclosures to be made by a guarantor in its interim and annual
financial statements with regard to its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN 45 are effective for interim and annual periods ending after December
15, 2002, and we have adopted those requirements for our financial statements
included in this Form 10-Q. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the recognition and initial
measurement requirements of FIN 45 is not expected to have a material impact on
the Companys financial position and results of operations.

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

Note 2  Discontinued Operations

On July 3, 2001, the Company completed the sale of its subsidiary, RPA
Airline Automation Services, Inc. (RPA), which provided airline revenue
accounting and management information software consisting of proprietary
software programs which are marketed to foreign and domestic airlines. During
the quarter ended September 30, 2001, the Company recorded a loss of $42,000 related
to the sale of a building that had previously been RPAs corporate
headquarters. As of June 30, 2002 the Company no longer retained any
significant assets or liabilities related to RPA.

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 $5.0
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.

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.

In September 2001, the Company filed a motion for declaratory judgment to
determine its liability as a result of a fuel spill on April 8, 2001 at the
Ontario, CA. Airport. On November 30, 2001, the Company received notice of a
counter-complaint filed by UPS against the Company and a third party seeking
indemnification and reimbursement in the amount of $470,000 for the costs
incurred as a result of the fuel spill. This matter is set for trial in March,
2003. Mercury does not believe the outcome of this claim will have a
significant impact on its financial position or operating results.

On May 1, 2002, Mercury received a Notice of Violation (NOV) for its
Fort Wayne, Indiana facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (SPCC) did not meet certain federal regulatory
guidelines. Specifically, the Environmental Protection Agency (EPA) alleged
that Mercurys SPCC failed to provide for proper parking, secondary
containment, and proper drainage of its refueler trucks. Mercury entered into
discussions with the EPA and responded to the NOV. On January 29, 2003, the EPA
again notified the Company of some deficiencies in its latest Spill Prevention
Control and Countermeasure Plan and

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requested that Mercury submit a written response to its allegations within
30 days. The Company is in the process of responding to the EPA. Mercury
intends to fully comply with all EPA requirements.

On October 31, 2002 a complaint was filed before the National Labor
Relations Board Region 12 on behalf of the Transport Workers Union of America,
Local 525, AFL-CIO alleging that Maytag Aircraft Corporation has been engaging
in unfair labor practices as set forth in the National Labor Relations Act at
its Patrick Air Force Base location. The Company is in the process of
responding to this compliant which is now scheduled for a hearing in April of
2003. Mercury does not believe that the outcome of this claim will have a
significant impact its consolidated financial position or operating results.

On November 18, 2002, Investorwatch LLC filed an action in the Superior
Court of the State of California for the County of Los Angeles, Central
District alleging derivative and direct claims against Mercury and certain of
its affiliates based upon alleged wrongful conduct in connection with certain
transactions entered into by Mercury, including certain related party
transactions, which transactions were previously disclosed by Mercury. The
Company believes that the matter is without merit and that it will not have a
significant impact on its operating results or financial position.

On November 27, 2002, Andrew J. Chitiea filed a shareholder verified
derivative complaint in the Superior Court of the State of California, County
of San Diego, North County Division alleging that certain directors of the
Company breached their fiduciary duty to the Company. The Company believes that
the matter is without merit and that it will not have a significant impact on
its operating results or financial position.

On December 23, 2002, Keith Scott filed suit in the Superior Court of the
State of California County of Los Angeles, Central Division against the Company
and certain current and past officers and directors alleging derivative and
direct claims against Mercury and certain of its affiliates based upon alleged
wrongful conduct in connection with certain transactions entered into by
Mercury, including certain related party transactions, which transactions were
previously disclosed by Mercury. The plaintiff subsequently dismissed the
matter when it was removed to Federal Court.

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

The Facility provides a total of up to $42.5 million in revolving and term
loans. The term loan is for an amount equal to $12.5 million, while the
revolving loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to certain limitations.
The term loan is payable in $1.0 million installments each April 1 and October
1, beginning April 1, 2003 and in $0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the term loan increase
the maximum availability under the revolving loan. The Facility also provides
for the issuance of certain letters of credit. The Facility may be terminated
on December 23, 2005, if the Whitney Note is not paid in full or refinanced, on
terms acceptable to Foothill, prior to October 31, 2005. The Facility is
secured by substantially all of the assets of the Company and its subsidiaries.
The Facility contains provisions that require the maintenance of certain
financial ratios including minimum EBITDA levels, minimum fixed charge coverage
ratios, and maximum annual capital expenditure levels. In addition, under the
Facility, the Company is prohibited from paying non-intercompany cash
dividends.

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

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issue the additional warrants and incur the additional note obligation. If
the Company determines that it is probable that the Note, or a portion of the
Note, will be prepaid, the estimated amount of the prepayment may be classified
as a current portion of long term debt on the Companys balance sheet. If the
Company determines that it is not probable that the Note, or any portion of the
Note, will be prepaid, the Company will accrue the additional cost of the new
warrants and the additional note obligation over the remaining term of the Note
when it is deemed that the prepayment is not probable. The Company is also
required to prepay all outstanding principal of the Note and any additional
note on December 31, 2004, but the failure by the Company to make such
prepayment will not entitle the holder to accelerate the balance on the
outstanding Note or outstanding additional note. The revised Whitney Note
contains similar covenants as in the original Note, including covenants that,
among other matters, limit senior indebtedness, the payment of
dividends, and the disposition of assets. The revised covenants also
include minimum EBITDA requirements and capital expenditure limitations. Under
the Whitney Note, the Company is also required to file a registration statement
with the Security and Exchange Commission (SEC), by March 31, 2003, for the
common stock underlying the warrants.

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

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

At June 30, 2002, the Company was in noncompliance with certain debt
covenants contained in the previous credit facility, giving the lenders the
right to declare the outstanding obligation immediately due and payable. As
such, the total principal amount outstanding on the previous Senior Secured
Credit Facility and the Note were classified on the Companys consolidated
balance sheet at June 30, 2002 as current portion of long-term debt and Senior
Subordinated Note, current. With the aforementioned refinancing, the default
conditions were removed and the debt at December 31, 2002 is classified as
current and long term based on normal due dates stipulated by the loan
agreement. In addition, for the three and six months ended December 31, 2002
the company wrote off $1.2 million and $1.7 million, respectively, in
capitalized loan costs relating to the previous credit facility and Note.

Note 6  Preferred Stock

During December 2002, the Company issued 462,627 shares of Series A 8%
Cumulative Convertible Preferred Stock (the Preferred Stock) at a stated
value of $1.00 per share with a par value of $0.01 per share to investors
having a pre-existing relationship with the Company, comprised of customers and
employees.

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

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Note 7  Net Income (Loss) Per Share

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

|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|-------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ------------------ |  | ----------------- | --------- | ----------------- |  | ------- | --------- | ----- |  | ------- | --------- | ----- |  |  | --------- |  |  |  | --------- |  |  |  | --------- |  |  |  | --------- | 
|                                                                                             |  | Six Months Ended  |           | Three Months Ended
|                                                                                             |  |                   |           |                   
|                                                                                             |  | December 31, 2002 |           | December 31, 2001  |  | December 31, 2002 |           | December 31, 2001
|                                                                                             |  |                   |           |                    |  |                   |           |                  
|                                                                                             |  | Diluted           |           | Basic              |  | Diluted           |           | Basic             |  | Diluted |           | Basic |  | Diluted |           | Basic
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |      
|Weighted average number of common
shares outstanding during the period                       |  |                   | 6,475,000 |                    |  |                   | 6,475,000 |                   |  |         | 6,577,000 |       |  |         | 6,577,000 |       |  |  | 6,486,000 |  |  |  | 6,486,000 |  |  |  | 6,577,000 |  |  |  | 6,577,000 | 
|Common share equivalents resulting
from the assumed exercise of
stock options                |  |                   |           |                    |  |                   |           |                   |  |         | 156,000   |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  | 149,000   |  |  |  |           | 
|Common shares resulting from the
assumed conversion of debentures                            |  |                   |           |                    |  |                   |           |                   |  |         | 32,000    |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  | 32,000    |  |  |  |           | 
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 
|Weighted average number of common
and common equivalent shares
outstanding during the period |  |                   | 6,475,000 |                    |  |                   | 6,475,000 |                   |  |         | 6,765,000 |       |  |         | 6,577,000 |       |  |  | 6,486,000 |  |  |  | 6,486,000 |  |  |  | 6,758,000 |  |  |  | 6,577,000 | 
|                                                                                             |  |                   |           |                    |  |                   |           |                   |  |         |           |       |  |         |           |       |  |  |           |  |  |  |           |  |  |  |           |  |  |  |           | 

Note 8  Stock Options

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

|                                     |  |                |            |                |  |   |          |  
|------------------------------------ |  | -------------- | ---------- | -------------- |  | - | -------- | -
|                                     |  | Six Months     |            | Three Months  
|                                     |  | Ended 12/31/02 |            | Ended 12/31/02
|                                     |  |                |            |               
|Net
loss  as reported               |  | $              | (1,185,000 | )              |  | $ | (596,000 | )
|Net loss  pro forma                 |  | $              | (1,388,000 | )              |  | $ | (617,000 | )
|Basic loss per share  as reported   |  | $              | (0.18      | )              |  | $ | (0.09    | )
|Basic loss per share  pro forma     |  | $              | (0.21      | )              |  | $ | (0.10    | )
|Diluted loss per share  as reported |  | $              | (0.18      | )              |  | $ | (0.09    | )
|Diluted loss per share  pro forma   |  | $              | (0.21      | )              |  | $ | (0.10    | )

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Note 9  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.

|                                                          |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |   |  |   |         | 
|--------------------------------------------------------- |  | ---------------------- | ------- | ---------- |  | ---------- | ------ | -------- |  | ----------- | ------ | ----- |  | ---------- | ------ | --------- |  | - | ------ | - |  | - | ------- | 
|                                                          |  |                        |         |            |  |            |        |          |  |             |        |       |  | Government |        | Corporate |  |   |        |  
|                                                          |  |                        |         |            |  | Fixed Base |        | Cargo    |  | Contract    |        | or    |  |            |        |          
|                                                          |  | Fuel Sales             |         | Operations |  | Operations |        | Services |  | Unallocated |        | Total
|                                                          |  |                        |         |            |  |            |        |          |  |             |        |      
|                                                          |  | (Dollars in Thousands)
|Quarter Ended December 31,
2002  Restated, see note 1    |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |   |  |   |         | 
|Revenues                                                  |  | $                      | 75,041  |            |  | $          | 23,882 |          |  | $           | 9,154  |       |  | $          | 6,314  |           |  | $ | (429   | ) |  | $ | 113,962 | 
|Gross Margin                                              |  |                        | 1,451   |            |  |            | 2,941  |          |  |             | 1,300  |       |  |            | 1,196  |           |  |   |        |   |  |   | 6,888   | 
|Depreciation and Amortization                             |  |                        | 54      |            |  |            | 1,328  |          |  |             | 546    |       |  |            | 90     |           |  |   | (20    | ) |  |   | 1,998   | 
|Capital Expenditures                                      |  |                        | 6       |            |  |            | 2,652  |          |  |             |        |       |  |            |        |           |  |   | 283    |   |  |   | 2,941   | 
|Segment Assets                                            |  |                        | 34,346  |            |  |            | 60,244 |          |  |             | 16,241 |       |  |            | 11,564 |           |  |   | 16,515 |   |  |   | 138,910 | 
|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                                            |  |                        | 23,665  |            |  |            | 64,685 |          |  |             | 17,085 |       |  |            | 13,950 |           |  |   | 15,135 |   |  |   | 134,520 | 
|Six Months Ended December 31,
2002  Restated, see note 1 |  |                        |         |            |  |            |        |          |  |             |        |       |  |            |        |           |  |   |        |   |  |   |         | 
|Revenues                                                  |  | $                      | 145,614 |            |  | $          | 47,708 |          |  | $           | 16,444 |       |  | $          | 12,520 |           |  | $ | (429   | ) |  | $ | 221,857 | 
|Gross Margin                                              |  |                        | 3,071   |            |  |            | 5,914  |          |  |             | 1,704  |       |  |            | 2,149  |           |  |   |        |   |  |   | 12,838  | 
|Depreciation and Amortization                             |  |                        | 108     |            |  |            | 2,581  |          |  |             | 1,092  |       |  |            | 181    |           |  |   | 87     |   |  |   | 4,049   | 
|Capital Expenditures                                      |  |                        | 6       |            |  |            | 3,176  |          |  |             | 65     |       |  |            |        |           |  |   | 304    |   |  |   | 3,551   | 
|Segment Assets                                            |  |                        | 34,346  |            |  |            | 60,244 |          |  |             | 16,241 |       |  |            | 11,564 |           |  |   | 16,515 |   |  |   | 138,910 | 
|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                                            |  |                        | 23,665  |            |  |            | 64,685 |          |  |             | 17,085 |       |  |            | 13,950 |           |  |   | 15,135 |   |  |   | 134,520 | 

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

Gross margin is used as the measure of profit and loss for segment
reporting purposes as it is viewed by key decision makers as the principal
operating indicator in measuring segment profitability. The key decision makers
also view bad debt expense as an important measure of profit and loss. The
predominant component of bad debt expense relates to Fuel Sales. Bad debt
expense for Fuel Sales was approximately $339,000 and $87,000 for the
three-month period ended December 31, 2002 and 2001, respectively; total bad
debt expense was $407,000 and $187,000 for the three-month period ended
December 31, 2002 and 2001, respectively. Bad debt expense for Fuel Sales was
approximately $632,000 and $572,000 for the six-month period ended December 31,
2002 and 2001, respectively; total bad debt expense was $759,000 and $772,000
for the six-month period ended December 31, 2002 and 2001, respectively.

Note 10  Comprehensive Income
(Loss)

Comprehensive income (loss) is summarized as follows:

|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  
|--------------------------------------- |  | ---------------- | ---------- | ------------------ |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                        |  | Six Months Ended |            | Three Months Ended
|                                        |  | December 31,     |            | December 31,      
|                                        |  |                  |            |                   
|                                        |  | 2002             |            | 2001               |  | 2002 |         | 2001
|                                        |  |                  |            |                    |  |      |         |     
|Net income (loss) - restated            |  | $                | (1,185,000 | )                  |  | $    | 767,000 |      |  | $ | (596,000 | ) |  | $ | (31,000 | )
|Foreign currency translation adjustment |  |                  | (45,000    | )                  |  |      |         |      |  |   | (6,000   | ) |  |   |         |  
|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  
|Comprehensive income (loss)             |  | $                | (1,230,000 | )                  |  | $    | 767,000 |      |  | $ | (602,000 | ) |  | $ | (31,000 | )
|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  

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Note 11  Related Party Transactions

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

In January 2002, the Company sold the land and the office building which
houses its corporate headquarters to CFK Realty Partners, LLC
(CFK Realty) for $4,200,000,
consisting of $2,800,000 cash and a note receivable of $1,400,000. The note
accrues interest at 5% and contains provisions whereby CFK Realty can
elect to extend the maturity date in one year increments through December 31,
2004. The note had an original maturity date of December 31, 2002. In early
December 2002, the Company received notification from CFK Realty that it
was exercising its right to extend the maturity date of the note for an
additional 1 year period. For the three- and six-month periods ended December
31, 2002, the Company has expended $89,000 and $275,000, respectively, for
leasehold improvements on its corporate headquarters. This amount will be
amortized over the office lease term.

CFK Realty financed the purchase of the headquarters through a $3.2
million loan. CFK Realty was formed by the same partners who formed CFK
Partners. See Note 1 under Restatement regarding the
restatement of the financial statements.

The Company and its Chairman (the Members) each own a 50% interest in
MercMed, LLC (MercMed). MercMed was formed to own and operate a corporate
aircraft. In early April, the Members agreed to sell the aircraft. As part of
this decision, the Members also agreed that the Company would fund the monthly
partner contributions to allow MercMed to meet its monthly financial
requirements as detailed in the Operating Agreement. From the period of April
1, 2002 through December 31, 2002 the Company has contributed $162,000 to
MercMed to meet its financial obligations. Since December 31, 2002, the Company
has contributed an additional $177,000. These contributions will be reflected
in the Companys Capital Account and will be collected upon the sale of the
aircraft. The Company is a guarantor on a note payable to a financial
institution which funded the purchase of the aircraft. As of December 31, 2002,
the principal amount of the note outstanding was $828,000. The note matures on
the earlier of June 29, 2003 or upon termination of the Senior Secured Credit
Facility. As of December 30, 2002, the Company has replaced the Senior Secured
Credit Facility. The note holder has not exercised its option to call the note
and the Company is in discussions to replace the existing note.

The Company uses the services of the legal firm McBreen and Kopko (the
Firm) for various general corporate legal matters. Mr. Frederick H. Kopko,
Jr., a partner of the Firm, is a member of the Companys Board of Directors and
is a partner with CFK Partners. For the three and six month period ended
December 31, 2002, the Company paid the Firm $215,000 and $362,000,
respectively, for legal services rendered.

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

Results of Operations Comparison of the Three Months Ended December 31,
2002 and December 31, 2001 and for the Six Months Ended December 31, 2002 and
December 31, 2001.

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

|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|--------------------------------------------------- |  | ----------------------------- | ----- | ------------------------------- |  | ----------------- | ----- | -------- |  | ------ | ----- | -------- |  | ------ | ----- | -------- |  | ----- | ----- | - |  |  | ----- | ----- |  | - | ---- | - |  |  | ----- | -
|                                                    |  | Six Months Ended December 31, |       | Three Months Ended December 31,
|                                                    |  |                               |       |                                
|                                                    |  | 2002(Restated(1))             |       | 2001                            |  | 2002(Restated(1)) |       | 2001    
|                                                    |  |                               |       |                                 |  |                   |       |         
|                                                    |  |                               |       |                                 |  | % of              |       |          |  |        |       | % of     |  |        |       |          |  | % of  |       |   |  |  |       | % of 
|                                                    |  |                               |       |                                 |  | Total             |       |          |  |        |       | Total    |  |        |       |          |  | Total |       |   |  |  |       | Total
|                                                    |  | Amount                        |       | Revenues                        |  | Amount            |       | Revenues |  | Amount |       | Revenues |  | Amount |       | Revenues
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |         
|                                                    |  | ($ in millions)              
|Revenues:                                           |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Fuel sales                                          |  | $                             | 145.6 |                                 |  |                   | 65.6  | %        |  | $      | 119.1 |          |  |        | 60.8  | %        |  | $     | 75.0  |   |  |  | 65.9  | %     |  | $ | 54.6 |   |  |  | 59.3  | %
|FBOs                                                |  |                               | 47.7  |                                 |  |                   | 21.5  |          |  |        | 47.1  |          |  |        | 24.0  |          |  |       | 23.9  |   |  |  | 21.0  |       |  |   | 23.1 |   |  |  | 25.1  |  
|Cargo operations                                    |  |                               | 16.5  |                                 |  |                   | 7.4   |          |  |        | 14.6  |          |  |        | 7.5   |          |  |       | 9.2   |   |  |  | 8.0   |       |  |   | 7.6  |   |  |  | 8.2   |  
|Government contract services                        |  |                               | 12.5  |                                 |  |                   | 5.6   |          |  |        | 15.0  |          |  |        | 7.7   |          |  |       | 6.3   |   |  |  | 5.5   |       |  |   | 6.8  |   |  |  | 7.4   |  
|Intercompany eliminations (2)                       |  |                               | (0.4  | )                               |  |                   | (0.1  | )        |  |        |       |          |  |        |       |          |  |       | (0.4  | ) |  |  | (0.4  | )     |  |   |      |   |  |  |       |  
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Total Revenue                                       |  | $                             | 221.9 |                                 |  |                   | 100.0 | %        |  | $      | 195.8 |          |  |        | 100.0 | %        |  | $     | 114.0 |   |  |  | 100.0 | %     |  | $ | 92.1 |   |  |  | 100.0 | %
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|                                                   
|                                                    |  |                               |       |                                 |  | % of              |       |          |  |        |       | % of     |  |        |       |          |  | % of  |       |   |  |  |       | % of 
|                                                    |  |                               |       |                                 |  | Unit              |       |          |  |        |       | Unit     |  |        |       |          |  | Unit  |       |   |  |  |       | Unit 
|                                                    |  | Amount                        |       | Revenues                        |  | Amount            |       | Revenues |  | Amount |       | Revenues |  | Amount |       | Revenues
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |         
|Gross Margin(3):                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Fuel sales                                          |  | $                             | 3.1   |                                 |  |                   | 2.1   | %        |  | $      | 3.3   |          |  |        | 2.8   | %        |  | $     | 1.5   |   |  |  | 1.9   | %     |  | $ | 1.4  |   |  |  | 2.6   | %
|FBOs                                                |  |                               | 5.9   |                                 |  |                   | 12.4  |          |  |        | 7.3   |          |  |        | 15.4  |          |  |       | 2.9   |   |  |  | 12.3  |       |  |   | 3.8  |   |  |  | 16.4  |  
|Cargo operations                                    |  |                               | 1.7   |                                 |  |                   | 10.4  |          |  |        | 1.2   |          |  |        | 7.9   |          |  |       | 1.3   |   |  |  | 14.2  |       |  |   | 0.9  |   |  |  | 11.6  |  
|Government contract services                        |  |                               | 2.1   |                                 |  |                   | 17.2  |          |  |        | 3.7   |          |  |        | 25.0  |          |  |       | 1.2   |   |  |  | 18.9  |       |  |   | 1.7  |   |  |  | 25.1  |  
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Total Gross Margin                                  |  | $                             | 12.8  |                                 |  |                   | 5.8   | %        |  | $      | 15.5  |          |  |        | 7.9   | %        |  | $     | 6.9   |   |  |  | 6.0   | %     |  | $ | 7.8  |   |  |  | 8.5   | %
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|                                                   
|                                                    |  |                               |       |                                 |  | % of              |       |          |  |        |       | % of     |  |        |       |          |  | % of  |       |   |  |  |       | % of 
|                                                    |  |                               |       |                                 |  | Total             |       |          |  |        |       | Total    |  |        |       |          |  | Total |       |   |  |  |       | Total
|                                                    |  | Amount                        |       | Revenues                        |  | Amount            |       | Revenues |  | Amount |       | Revenues |  | Amount |       | Revenues
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |         
|Selling, general and
administrative                 |  | $                             | 5.2   |                                 |  |                   | 2.4   | %        |  | $      | 4.7   |          |  |        | 2.4   | %        |  | $     | 2.7   |   |  |  | 2.3   | %     |  | $ | 2.8  |   |  |  | 3.0   | %
|Provision for bad debts                             |  |                               | 0.8   |                                 |  |                   | 0.3   |          |  |        | 0.8   |          |  |        | 0.4   |          |  |       | 0.4   |   |  |  | 0.4   |       |  |   | 0.2  |   |  |  | 0.2   |  
|Depreciation and amortization                       |  |                               | 4.0   |                                 |  |                   | 1.8   |          |  |        | 4.7   |          |  |        | 2.4   |          |  |       | 2.0   |   |  |  | 1.8   |       |  |   | 2.4  |   |  |  | 2.6   |  
|Interest expense and other                          |  |                               | 2.9   |                                 |  |                   | 1.3   |          |  |        | 3.0   |          |  |        | 1.4   |          |  |       | 1.5   |   |  |  | 1.3   |       |  |   | 1.5  |   |  |  | 1.6   |  
|Cost and expenses of stock
offering                 |  |                               |       |                                 |  |                   |       |          |  |        | 1.0   |          |  |        | 0.5   |          |  |       |       |   |  |  |       |       |  |   | 1.0  |   |  |  | 1.1   |  
|Debt extinguishment costs                           |  |                               | 1.7   |                                 |  |                   | 0.7   |          |  |        |       |          |  |        |       |          |  |       | 1.2   |   |  |  | 1.1   |       |  |   |      |   |  |  |       |  
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Income (loss) before income
taxes                   |  |                               | (1.8  | )                               |  |                   | (0.8  | )        |  |        | 1.3   |          |  |        | 0.7   |          |  |       | (0.9  | ) |  |  | (0.8  | )     |  |   | (0.1 | ) |  |  | (0.0  | )
|Provision for income taxes                          |  |                               | (0.6  | )                               |  |                   | (0.3  | )        |  |        | 0.5   |          |  |        | 0.3   |          |  |       | (0.3  | ) |  |  | (0.3  | )     |  |   | 0.0  |   |  |  | (0.0  | )
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Income (loss) from continuing
operations before tax |  |                               | (1.2  | )                               |  |                   | (0.5  | )        |  |        | 0.8   |          |  |        | 0.4   |          |  |       | (0.6  | ) |  |  | (0.5  | )     |  |   | (0.1 | ) |  |  | (0.0  | )
|Loss from discontinued
operations                   |  |                               |       |                                 |  |                   |       |          |  |        | (0.1  | )        |  |        | (0.0  | )        |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  
|Net income (loss)                                   |  | $                             | (1.2  | )                               |  |                   | (0.5  | )%       |  | $      | 0.8   |          |  |        | 0.4   | %        |  | $     | (0.6  | ) |  |  | (0.5  | )%    |  | $ | (0.1 | ) |  |  | 0.0   | %
|                                                    |  |                               |       |                                 |  |                   |       |          |  |        |       |          |  |        |       |          |  |       |       |   |  |  |       |       |  |   |      |   |  |  |       |  



|(1) |  | See Note 1 of notes to
consolidated financial statements under Restatement
regarding the restatement of the financial statements.                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Intercompany eliminations represent sales between the fuel sales division
and the FBO division.                                                         
|   
|(3) |  | Gross margin as used here and throughout Managements Discussion excludes
depreciation and amortization and selling, general and administrative
expense.

Three Months ended December 31, 2002 compared to the Three Months ended
December 31, 2001

Revenue in the second quarter of fiscal year 2003 was $114.0 million,
representing an increase of 23.8% from the revenue reported for the second
quarter of fiscal year 2002 of $92.1 million. The increase in revenue is
primarily attributed to a combination of higher average sale prices for
petroleum products in the current quarter and the effects of last years tragic
events of September 11, 2001, that adversely effected sales in the prior fiscal
years second quarter. The gross margin in the current quarter was $6.9
million, a decrease of $0.9 million or 11.7% from the gross margin of $7.8
million reported last year. The decline in gross margin was primarily the
result of lower realized margins at the Companys FBO operations and lower
margins in the Government Contract Services business partially offset by higher
margins in the Cargo operations. Part of the lower gross margin in the FBO
operations is attributed to the

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sale of the Companys FBO in Bedford, Massachusetts (the Bedford FBO) in
June 2002.

Revenue from the Fuel Sales business represented 65.9% of total revenue in
the current period as compared to 59.3% of revenue a year ago. Fuel Sales
revenue totaled $75.0 million in the current period, an increase of 37.4% from
the same period last year, on volume of 78.2 million gallons. This compares
favorably to revenue during the second quarter of fiscal 2002 of $54.6 million
on sales volume of 70.9 million gallons. The increase in sales revenue and
volume is attributed to a combination of higher average sales prices for
petroleum products and the effect on last years sales volume that declined
following September 11, 2001. The current quarter was also impacted by reduced
volume resulting from the cessation of business by National Airlines, Inc.
(National) effective November 6, 2002. Gross margin from fuel sales was $1.5
million in the current period, essentially unchanged from last years gross
margin of $1.4 million. The average sales price for fuel in the current period
was 96.0 cents per gallon, an increase of 19.4 cents per gallon from the
average price of 76.6 cents per gallon last year while the average cost of fuel
rose 18.9 cents per gallon to 92.5 cents per gallon as compared to 73.6 cents
per gallon last year.

National, a customer of the Companys MercFuel, Inc. (MercFuel)
subsidiary, announced that it was ceasing operations on November 6, 2002. The
Company had been providing fuel to National since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the Company continued
to sell fuel to National on a secured basis under the auspices of the
bankruptcy court. Sales to National during the second quarter of fiscal year
2003 were $7.2 million as compared to $9.9 million for the same period last
year. As a result of the secured nature of the transactions, the amount of loss
on the cessation of business was negligible.

Revenue from the FBO business segment for the second quarter of fiscal
year 2003 was $23.9 million on sales volume of 8.3 million gallons. This
compares to revenue of $23.1 million on sales volume of 9.1 million gallons
last year. Excluding the contribution of the Bedford FBO from last years
results, revenue increased $2.7 million or 12.5% with essentially no change in
sales volume. The increase in revenue, after adjusting last years results to
exclude the Bedford FBO, was primarily due to higher average sales price of
aviation fuel. The FBOs gross margin was $2.9 million in the current period as
compared to $3.8 million last year, which included $0.5 million from the
Bedford FBO. The decline in gross margin is primarily due to higher operating
expenses partially offset by higher margin on aviation fuel sales.

The Cargo business segment had revenue of $9.2 million in the second
quarter of fiscal year 2003, an increase of $1.6 million, or 21.2%, from last
years revenue of $7.6 million. The increase in revenue is primarily attributed
to higher revenue in the cargo handling operation, which had increased handling
volume due to the west coast dockworkers strike that positively impacted air
cargo shipments. Gross margin from the Cargo business segment in the current
period was $1.3 million, an increase of $0.4 million from last years results,
primarily due to higher margins in the cargo handling operations partially
offset by higher start-up expenses for the Mercury World Cargo operations.

Revenue from the Government Contract Services segment was $6.3 million, a
decrease of $0.5 million, or 7.3%, from last years second quarter revenue of
$6.8 million. The decline in revenue is primarily due to the loss of two
refueling contracts. Gross margin for the second quarter of fiscal year 2003
was $1.2 million, a decrease of $0.5 million from last years gross margin of
$1.7 million. The decrease in gross margin is primarily attributed to reduced
margin on the base operations services contracts.

Selling, general and administrative expenses in the second quarter were
$2.7 million, which decreased by $0.1 million from last year.

Provision for bad debts increased in the current period to $0.4 million
from $0.2 million last year primarily due to higher average petroleum product
prices which resulted higher billing to fuel customers and the economic
uncertainty surrounding the aviation industry.

Depreciation and amortization expense was $2.0 million in the current
period as compared to $2.4 million last year. The reduction is primarily due to
the sale of the Bedford FBO in June 2002. The current period reduction also
reflects the non-amortization of goodwill for fiscal year 2003 which resulted
in a $0.1 million decrease from the three months ended December 31, 2001.

Interest expense in the current period was $1.5 million, essentially
unchanged from last year.

As a result of the restructuring of the Companys long term debt in the
current period, the Company incurred debt extinguishment costs of $1.2 million.
This is comprised of the unamortized portion of the deferred debt issuance
costs associated with the previous senior secured credit facility and the
subordinated note at the time of early debt extinguishment and note amendment.

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

Income tax benefit approximated 34.5% and 38.5% of pre-tax loss for the
three months ended December 31, 2003 and 2002, respectively, reflecting the
expected effective annual tax rate.

Six Months ended December 31, 2002 compared to Six Months ended December 31,
2001

Revenue for the first six months of fiscal year 2003 was $221.9 million,
representing an increase of 13.3% from the revenue reported for the same period
a year ago of $195.8 million. The increase in revenue is primarily attributed
to higher average sale prices for petroleum products and due to the adverse
effect last year of the tragic events of September 11, 2001. Gross margin in
the current period was $12.8 million, a decrease of $2.7 million or 17.3% from
the gross margin of $15.5 million reported last year. The decline in gross
margin was primarily the result of lower realized margins at the Companys FBO
operations and lower margins in the Government Contract Services business
partially offset by higher margins in the Cargo operations. Part of the lower
gross margin in the FBO operations is attributed to the sale of the Companys
Bedford FBO in June 2002.

Revenue from the Fuel Sales business represented 65.6% of total revenue in
the current period as compared to 60.8% of revenue a year ago. Fuel sales
revenue totaled $145.6 million in the current period, an increase of 22.3% from
the same period last year, on volume of 158.2 million gallons. This compares
favorably to revenue during the first six months of fiscal year 2002, of $119.1
million on a sales volume of 143.2 million gallons. The increase in sales
revenue and volume is attributed to higher average sales prices for petroleum
products during the current year and the adverse effect on last years sales
volume due to September 11, 2001. The current years sales also reflect reduced
volume, as compared to last year, due to the cessation of business by National
effective November 6, 2002. Gross margin from fuel sales was $3.1 million in
the current period, down slightly from last years gross margin of $3.3
million. The average sales price for fuel in the current period was 92.0 cents
per gallon, an increase of 9.0 cents per gallon from the average price of 83.0
cents per gallon last year while the average cost of fuel rose 9.3 cents per
gallon to 88.6 cents per gallon as compared to 79.3 cents per gallon last year.

National, a customer of the Companys MercFuel, Inc. (MercFuel)
subsidiary, announced that it was ceasing operations on November 6, 2002. The
Company had been providing fuel to national since May 1999. In December 2000,
National filed for Chapter 11 bankruptcy protection and the Company continued
to sell fuel to National on a secured basis under the auspices of the
bankruptcy court. Sales to National for the first six months of fiscal year
2003 were $24.7 million as compared to $25.0 million for the same period last
year. As a result of the secured nature of the transactions, the amount of loss
on the cessation of business was negligible.

Revenue from the FBO business segment for the first six months of fiscal
year 2003 was $47.7 million on a sales volume of 17.0 million gallons. This
compares to revenue of $47.1 million on a sales volume of 18.2 million gallons
last year. Excluding the contribution of the Bedford FBO from last years
results, revenue increased $3.8 million or 8.8% with essentially no change in
sales volume. The increase in revenue, after adjusting last years results to
exclude the Bedford FBO, was primarily due to higher average sales price of
aviation fuel. The FBOs gross margin was $5.9 million in the current period as
compared to $7.3 million last year, which included $0.8 million from the
Bedford FBO. The decline in gross margin is primarily due to higher operating
expenses partially offset by higher margin on aviation fuel sales.

The Cargo business segment had revenue of $16.4 million during the first
six months of fiscal year 2003, an increase of $1.8 million, or 12.0%, from
last years revenue of $14.6 million. The increase in revenue is primarily
attributed to higher revenue in the cargo handling operation, which had
increased handling volume due to the west coast dockworkers strike and due to
improved import/export activity. Gross margin from the Cargo business segment
in the current period was $1.7 million, an increase of $0.5 million from last
years results, primarily due to higher margins in the cargo handling
operations partially offset by higher start-up expenses for the Mercury World
Cargo operations and lower margins in the Cargo Management operations.

Revenue from the government contract services segment was $12.5 million, a
decrease of $2.5 million, or 16.3%, from last years revenue of $15.0 million.
The decline in revenue is primarily due to the loss of the Yokota, Japan
contract, which expired in September 2001 and two refueling contracts. The
Yokota contract provided $1.4 million, or 9.3%, of the government contract
services segment revenue during the first six months of fiscal year 2002. Gross
margin for the first six months of fiscal year 2003 was $2.1 million, a
decrease of $1.6 million from last years gross margin of $3.7 million. The
decrease in gross margin is primarily attributed to the loss of the Yokota,
Japan contract, lower margin on the Kuwait Air Terminal contract and a reserve
for a legal settlement of $0.3 million in fiscal year 2003.

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The Companys selling, general and administrative expenses for the current
period were $5.2 million, an increase of $0.5 from last years expense of $4.7
million. The increased expense was primarily due to expenses associated with
the extension of certain stock options and the establishment of an
environmental reserve of $0.3 million for a previously sold site.

Provision for bad debts of $0.8 million is essentially unchanged from last
year.

Depreciation and amortization expense was $4.0 million in the current
period as compared to $4.7 million last year. The reduction is primarily due to
the sale of the Bedford FBO in June 2002. The current period also reflects the
non-amortization of goodwill for fiscal year 2003 which resulted in a $0.2
million decrease in amortization from the prior year.

Interest expense in the current period was $2.9 million, a decrease of
$0.1 million from last years interest expense of $3.0 million. The interest
expense was lower due to a lower average amount of principle outstanding during
the current period offset by higher effective interest rates primarily due to
the application of the default interest rate to the Note prior to refinancing.

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

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

Income tax (benefit) expense approximated 34.5% and 38.5% of pre-tax
(loss) income for the first six months ended December 31, 2003 and 2002,
respectively, reflecting the expected effective annual tax rate.

Liquidity and Capital Resources:

As of December 31, 2002, the Companys cash and cash equivalents were $4.4
million, a reduction of $1.2 million for the six month period then ended. Cash
used in operating activities for the six month period ended December 31, 2002
was $1.3 million comprised of cash generated of $6.7 million from earnings,
adjusted for non-cash items, less $8.1 million for an increase in net working
capital. The increase in working capital was primarily due to an increase in
Mercfuels trade receivables and a reduction in the current income tax
liability.

During the first six months of fiscal year 2003, the Company used $0.8
million in investing activities. The company made additions of $3.6 million to
property, plant and equipment primarily for hangar and tank farm projects for
the fixed base operations. In addition, the Company used $1.0 million for the
purchase of fuel sales contracts for the fuel sales division. These outlays
were offset by a decrease in restricted cash of $3.8 million generated by the
sale of the Bedford FBO and used to reduce long-term debt.

The Companys financing activities provided $1.0 million in cash primarily
due to a net draw down on the revolving credit facility. In addition the
Company generated $0.3 million and $0.1 million from the issuance of preferred
stock and exercise of stock options, respectively. The issuance of the
Preferred Stock occurred after the Company was unable to draw-down on the
previous revolving credit facility.

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

The Facility provides a total of up to $42.5 million in revolving and term
loans. The term loan is for an amount equal to $12.5 million, while the
revolving loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to certain limitations.
The term loan is payable in $1.0 million installments each April 1 and October
1, beginning April 1, 2003 and in $0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the term loan increase
the maximum availability under the revolving loan. The Facility also provides
for the issuance of certain letters of credit.

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##### Table of Contents



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

The revised Whitney Note is in the form of a $24.0 million Senior
Subordinated 12% Note (the Note) with detachable warrants to purchase 503,126
shares of the Companys common stock exercisable at $3.742 per share through
September 9, 2006. The warrant exercise price was reduced from $5.50 per share.
The Note is secured by the Companys assets, subordinate to Foothills
interest. Warrants to purchase an additional 5% of the Companys common stock,
exercisable for nominal consideration, will be issued if the principal amount
of the Note is not prepaid by December 31, 2003. Warrants to purchase a second
5% of the Companys common stock, exercisable for nominal consideration, along
with an additional note in the original principal amount of $5,000,000, will
also be issued if the outstanding principal amount of the Note is greater than
$12,000,000 after December 31, 2003. The Company is currently assessing various
options that will enable it to prepay the principal portion of the Note to
avoid the necessity of having to issue the additional warrants and incur the
additional note obligation. If the Company determines that it is probable that
the Note, or a portion of the Note, will be prepaid, the estimated amount of
the prepayment may be classified as a current portion of long term debt on the
Companys balance sheet. If the Company determines that it is not probable that
the Note, or any portion of the Note, will be prepaid, the Company will accrue
the additional cost of the new warrants and the additional note obligation over
the remaining term of the Note when it is deemed that the prepayment is not
probable. The Company is also required to prepay all outstanding principal of
the Note and any additional note on December 31, 2004, but the failure by the
Company to make such prepayment will not entitle the holder to accelerate the
balance on the outstanding Note or outstanding additional note. The revised
Whitney facility contains similar covenants as in the original Note, including
covenants that, among other matters, limit senior indebtedness, the payment of
dividends, and the disposition of assets. The revised covenants also include
minimum EBITDA requirements and capital expenditure limitations. Under the
Whitney Note, the Company is also required to file a registration statement
with the SEC, by March 31, 2003, for the common stock underlying the warrants.

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

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

Critical Accounting Policies

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




Item 3.Quantitative and Qualitative Disclosure About Market Risk

The Company does not currently utilize material derivative financial
instruments which expose the Company to significant market risk. However, the
Companys cash flow, earnings, and the fair value of its debt, may be adversely
effected due to changes in interest rates with respect to its long-term debt.
The table below presents principal cash flows and related weighted average
interest rates of the Companys long-term debt at December 31, 2002 by expected
maturity dates. Weighted average variable rates are based on rates in effect at
December 31, 2002. These rates should not be considered a predictor of actual
future interest rates.

21



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##### Table of Contents



Expected Maturity Date

|                                  |  |         |           |         |  |         |           |         |  |         |           |            |  |       |            |            |  |   |           |   |  |   |            |   |  |   |            |   |  |   |            | 
|--------------------------------- |  | ------- | --------- | ------- |  | ------- | --------- | ------- |  | ------- | --------- | ---------- |  | ----- | ---------- | ---------- |  | - | --------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | 
|                                  |  | June-03 |           | June-04 |  | June-05 |           | June-06 |  | June-07 |           | Thereafter |  | Total |            | Fair Value
|                                  |  |         |           |         |  |         |           |         |  |         |           |            |  |       |            |           
|Fixed Rate
Subordinated
Note      |  |         | 0         |         |  |         | 0         |         |  |         | 0         |            |  | $     | 23,355,000 |            |  |   | 0         |   |  |   | 0          |   |  | $ | 23,355,000 |   |  | $ | 24,000,000 | 
|Average Interest
Rate(3)          |  |         | 29.3      | %       |  |         | 29.3      | %       |  |         | 29.3      | %          |  |       | 29.3       | %          |  |   | 0         |   |  |   | 0          |   |  |   | 29.3       | % |  |   |            | 
|Fixed Rate Other
Debt             |  | $       | 224,000   |         |  | $       | 100,000   |         |  | $       | 26,000    |            |  | $     | 26,000     |            |  | $ | 26,000    |   |  | $ | 173,000    |   |  | $ | 580,000    |   |  | $ | 580,000    | 
|Average Interest
Rate             |  |         | 8.50      | %       |  |         | 8.58      | %       |  |         | 9.14      | %          |  |       | 9.14       | %          |  |   | 9.14      | % |  |   | 9.14       | % |  |   | 8.80       | % |  |   |            | 
|Variable Rate Tax
Exempt Bonds(1) |  | $       | 500,000   |         |  | $       | 1,000,000 |         |  | $       | 1,000,000 |            |  | $     | 1,000,000  |            |  | $ | 1,000,000 |   |  | $ | 10,000,000 |   |  | $ | 14,500,000 |   |  | $ | 14,500,000 | 
|Average Interest
Rate             |  |         | 1.61      | %       |  |         | 1.61      | %       |  |         | 1.61      | %          |  |       | 1.61       | %          |  |   | 1.61      | % |  |   | 1.61       | % |  |   | 1.61       | % |  |   |            | 
|Variable Rate Other
Debt(2)       |  | $       | 1,000,000 |         |  | $       | 3,000,000 |         |  | $       | 3,000,000 |            |  | $     | 3,000,000  |            |  | $ | 2,500,000 |   |  | $ | 5,923,000  |   |  | $ | 18,423,000 |   |  | $ | 18,423,000 | 
|Average Interest
Rate             |  |         | 5.00      | %       |  |         | 5.00      | %       |  |         | 5.00      | %          |  |       | 5.00       | %          |  |   | 5.00      | % |  |   | 5.00       | % |  |   | 5.00       | % |  |   |            | 



---

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

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




Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

Forward-Looking Statements

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

22



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##### Table of Contents






PART II  OTHER INFORMATION




Item 1.Legal Proceedings

In April 2000, Mercury filed a collection action against AER Global
Logistics (AER) in the state of New York. AER filed a counterclaim for $5.0
million alleging among other things, tortious interference with contract.
Mercury believes that this claim is without merit, and accordingly, does not
believe this matter will have a significant impact on its financial position or
operating results.

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

In September 2001, the Company filed a motion for declaratory judgment to
determine its liability as a result of a fuel spill on April 8, 2001 at the
Ontario, CA. Airport. On November 30, 2001, the Company received notice of a
counter-complaint filed by UPS against the Company and a third party seeking
indemnification and reimbursement in the amount of $470,000 for the costs
incurred as a result of the fuel spill. This matter is set for trial in March,
2003. Mercury does not believe the outcome of this claim will have a
significant impact on its financial position or operating results.

On May 1, 2002, Mercury received a Notice of Violation (NOV) for its
Fort Wayne, Indiana facility alleging that Mercurys Spill Prevention, Control
and Countermeasure Plan (SPCC) did not meet certain federal regulatory
guidelines. Specifically, the Environmental Protection Agency (EPA) alleged
that Mercurys SPCC failed to provide for proper parking, secondary
containment, and proper drainage of its refueler trucks. Mercury entered into
discussions with the EPA and responded to the NOV. On January 29, 2003, the EPA
again notified the Company of some deficiencies in its latest Spill Prevention
Control and Countermeasure Plan and requested that Mercury submit a written
response to its allegations within 30 days. The Company is in the process of
responding to the EPA. Mercury intends to fully comply with all EPA
requirements.

On October 31, 2002 a complaint was filed before the National Labor
Relations Board Region 12 on behalf of the Transport Workers Union of America,
Local 525, AFL-CIO alleging that Maytag Aircraft Corporation has been engaging
in unfair labor practices as set forth in the National Labor Relations Act at
its Patrick Air Force Base location. The Company is in the process of
responding to this compliant which is now scheduled for a hearing in April of
2003. Mercury does not believe that the outcome of this claim will have a
significant impact its consolidated financial position or operating results.

On November 18, 2002, Investorwatch LLC filed an action in the Superior
Court of the State of California for the County of Los Angeles, Central
District alleging derivative and direct claims against Mercury and certain of
its affiliates based upon alleged wrongful conduct in connection with certain
transactions entered into by Mercury, including certain related party
transactions, which transactions were previously disclosed by Mercury. The
Company believes that the matter is without merit and that it will not have a
significant impact on its operating results or financial position.

On November 27, 2002, Andrew J. Chitiea filed a shareholder verified
derivative complaint in the Superior Court of the State of California, County
of San Diego, North County Division alleging that certain directors of the
Company breached their fiduciary duty to the Company. The Company believes that
the
matter is without merit and that it will not have a significant impact on its
operating results or financial position.

On December 23, 2002, Keith Scott filed suit in the Superior Court of the
State of California County of Los Angeles, Central Division against the Company
and certain current and past officers and directors alleging derivative and
direct claims against Mercury and certain of its affiliates based upon alleged
wrongful conduct in connection with certain transactions entered into by
Mercury, including certain related party transactions, which transactions were
previously disclosed by Mercury. The plaintiff subsequently dismissed the
matter when it was removed to Federal Court.

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.




Item 2.Change in Securities

23



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##### Table of Contents



a) None

b) The newly-issued Series A 8% Cumulative Convertible Preferred Stock
ranks senior to the Companys common stock as to the payment of dividends and
distribution on liquidation.

c) During December 2002, the Company issued and sold 462,627 shares of
Series A 8% Cumulative Convertible Preferred Stock (Preferred Stock) to
investors having a pre-exiting relationship with the Company, comprised of
customers and employees. The aggregate consideration received for such shares
was $462,627, $259,432 in cash and $203,195 in lieu of cash for previously
earned bonuses. No underwriters were engaged in connection with these issuances
and sales, which were made in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, relating to sales by an
issuer not involving a public offering. The shares of the Preferred Stock are
convertible to common stock, at the option of the stockholder, at a conversion
price of $7.50 per share. Dividends on the Preferred Stock are accrued on a
semi-annual basis at an annual rate of 8.0% and paid, either in cash or in-kind
at the election of the Company. During a 30-day period immediately following
the third, fourth, fifth and each subsequent anniversary date of the issuance
of the Preferred Stock, both the Company and the stockholder have the option to
redeem the then outstanding shares of Preferred Stock for an amount equal to
$1.00 plus all accrued but unpaid dividends for each share of Preferred Stock
redeemed. The Company has the option, whether the Company or the Stockholder
exercised their redemption option, to pay all or part of the redemption in
shares of the Companys common stock. In the event of any liquidation of the
Company, the holders of Preferred Stock have a liquidation preference over
common stock, plus all declared but unpaid dividends. In the event the assets
are insufficient to cover the aforesaid amounts, the Preferred Stockholders
would share in the assets ratably in proportion to the full preferential amount




Item 3.Default Upon Senior Securities

The Company was in noncompliance with the maximum capital expenditure
covenant of the Senior Secured 12% Note (the Note) for the fiscal year ended
June 30, 2002. In November, 2002, the Company received written notice from the
Note Holder constituting a Subordinated Default Notice whereby the Note Holder
advised the Company of the event of default, and while not declaring the
outstanding principal and accrued interest immediately due and payable, the
Note Holder reserves all rights to take any action allowable under the Note
Agreement, including the acceleration of the maturity date. The notice also
advised the Company that the Note holder is due additional interest at the
default rate until such defaults are cured or
waived. The default interest represents an additional 2.0% per annum over the
stated interest rate of 12.0% on the outstanding balance and is to be effective
retroactive to June 30, 2002.

On December 31, 2002, the Company and the Note holder amended the terms of
the Note. Upon execution of the amendment, the Note Holder agreed to waive the
events resulting in the default conditions. As of December 31, 2002, the
Company was in compliance with all the conditions of the Note, as amended.




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

On November 19, 2002, the Company held its annual meeting of Shareholders.

All of the Companys directors were re-elected at the meeting by the
following votes:

|                     |  |     |           |         |  |                 |         |  |  |            |     | 
|-------------------- |  | --- | --------- | ------- |  | --------------- | ------- |  |  | ---------- | --- | 
|                     |  |     |           |         |  |                 |         |  |  | Abstain or
|Name                 |  | For |           | Against |  | Broker Non-Vote
|                     |  |     |           |         |  |                
|Dr. Philip Fagan, Jr |  |     | 5,653,539 |         |  |                 | 449,838 |  |  |            | -0- | 
|Joseph A. Czyzyk     |  |     | 5,417,713 |         |  |                 | 685,664 |  |  |            | -0- | 
|Frederick H. Kopko   |  |     | 5,670,539 |         |  |                 | 432,838 |  |  |            | -0- | 
|Gary J. Feracota     |  |     | 5,670,539 |         |  |                 | 432,838 |  |  |            | -0- | 
|Sergei Kouzmine      |  |     | 5,670,539 |         |  |                 | 432,838 |  |  |            | -0- | 
|Michael J. Janowiak  |  |     | 5,670,539 |         |  |                 | 432,838 |  |  |            | -0- | 

In addition, the proposal seeking approval to amend Article III of the
Corporations Certificate of Incorporation to effect a one-for-two reverse
stock split on the outstanding common stock was adopted by the following votes:

|          |  |         |         |                            |  |  |        | 
|--------- |  | ------- | ------- | -------------------------- |  |  | ------ | 
|For       |  | Against |         | Abstain or Broker Non-Vote
|          |  |         |         |                           
|5,675,497 |  |         | 404,507 |                            |  |  | 23,373 | 

24



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##### Table of Contents



Also submitted to a vote, but not adopted was the proposal to amend
Article III of the Corporations Certificate of Incorporation to amend the
number of authorized shares of common stock from 18,000,000 to 30,000,000 and
to increase the number of authorized preferred stock from 3,000,000 to
10,000,000.

|    |           |         |  |                            |           |  |  |  |           | 
|--- | --------- | ------- |  | -------------------------- | --------- |  |  |  | --------- | 
|For |           | Against |  | Abstain or Broker Non-Vote
|    |           |         |  |                           
|    | 2,279,251 |         |  |                            | 1,411,701 |  |  |  | 2,412,425 | 




Item 5.Other Information

None




Item 6.Exhibits and Reports on Form 8-K

(a)  Exhibits.

|        |  |                                                                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                      
|No.     |  | Description                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                      
|2.1     |  | Agreement and Plan of Merger adopted January 9, 2001.(17)                                                                                                                                                                                                                                                            
|2.2     |  | Certificate of Merger.(17)                                                                                                                                                                                                                                                                                           
|3.1     |  | Certificate of Incorporation.(17)                                                                                                                                                                                                                                                                                    
|3.2     |  | Amended and Restated Bylaws of Mercury Air Group, Inc.
adopted December 7, 2002.(25)                                                                                                                                                                                                                                 
|3.3     |  | Certificate of Designations of Series A 8% Cumulative
Convertible Preferred Stock.                                                                                                                                                                                                                                   
|4.1     |  | Loan Agreement between California Economic Development
Financing Authority and Mercury Air Group, Inc. relating to
$19,000,000 California Economic Development Financing
Authority Variable Rate Demand Airport Facilities Revenue
Bonds, Series 1998 (Mercury Air Group, Inc. Project) dated
as of April 1, 1998.(2)
|4.2     |  | Securities Purchase Agreement dated September 10, 1999 by
and among Mercury Air Group, Inc. and J.H. Whitney Mezzanine
Fund, L.P.(12)                                                                                                                                                                                
|4.3     |  | Amendment No. 1 dated as of September 30, 2000 by and
between J.H. Whitney Mezzanine, L.P. and Mercury Air Group,
Inc. to the Securities Agreement.(16)                                                                                                                                                              
|4.4     |  | Waiver and Consent Agreement dated as of December 29, 2000
among Mercury Air Group, Inc. and J.H. Whitney Mezzanine
Fund, L.P.(17)                                                                                                                                                                                   
|4.5     |  | Waiver and Consent Agreement dated as of July 2, 2001 among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund,
L.P.(18)                                                                                                                                                                                        
|4.6     |  | Waiver Agreement dated as of September 25, 2001 among
Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund,
L.P.(18)                                                                                                                                                                                              
|4.7     |  | Amendment No. 2 dated as of September 30, 2001 by and
between J.H.Whitney Mezzanine Fund, L.P. and Mercury Air
Group, Inc. to the Securities Purchase Agreement.(19)                                                                                                                                                 
|4.8     |  | Waiver Agreement dated as of November 26, 2001 among Mercury
Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(21)                                                                                                                                                                                                    
|4.9     |  | Waiver Agreement dated as of December 21, 2001 among Mercury
Air Group, inc. and J.H. Whitney Mezzanine, L.P.(21)                                                                                                                                                                                                    
|4.10    |  | Waiver Agreement dated as of June 26, 2002 among Mercury Air
Group, inc. and J.H.Whitney Mezzanine, L.P.(24)                                                                                                                                                                                                         
|4.11    |  | Amendment No. 3 to Securities Purchase Agreement by and
between Mercury Air Group, Inc., and J.H. Whitney Mezzanine
Fund, L.P. dated as of December 30, 2002.(26)                                                                                                                                                    
|4.12    |  | Amended and Restated J.H. Whitney Mezzanine Fund, L.P.
Warrant dated September 10, 1999.(26)                                                                                                                                                                                                                         

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##### Table of Contents



|        |  |                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                         
|No.     |  | Description                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                         
|4.13    |  | Amended and Restated J. H. Whitney Mezzanine Fund, L.P.
Senior Subordinated Promissory Note dated September 10,
1999.(26)                                                                                               
|4.14    |  | Security Agreement by and between Mercury Air Group, Inc.
and each of its Subsidiaries hereto as Obligors and J.H.
Whitney Mezzanine Fund, L.P. as the Lenders, dated as of
December 30, 2002.(26)                      
|4.15    |  | Subordination Agreement among J.H. Whitney Mezzanine Fund,
L.P. Foothill Capital Corporation, as Agent and Mercury Air
Group, Inc. and Certain of its subsidiaries signatory
thereto, dated as of December 30, 2002.(26)
|4.16    |  | Loan and Security Agreement by and among Foothill Capital
Corporation and Mercury Air Group, Inc. and certain
subsidiaries signatory thereto, dated as of December 30,
2002.(26)                                        
|10.1    |  | Companys 1990 Long-Term Incentive Plan.(4)*                                                                                                                                                                            
|10.2    |  | Companys 1990 Directors Stock Option Plan.(1)*                                                                                                                                                                         
|10.3    |  | Lease for 6851 West Imperial Highway, Los Angeles,
California.(3)                                                                                                                                                       
|10.4    |  | Memorandum Dated September 15, 1997 regarding Summary of
Officer Life Insurance Policies with Benefits Payable to
Officers or Their Designated Beneficiaries.(8)*                                                       
|10.5    |  | Non-Qualified Stock Option Agreement dated March 21, 1996,
by and between Frederick H. Kopko and Mercury Air Group,
Inc.(6)*                                                                                            
|10.6    |  | Companys 1998 Long-Term Incentive Plan.(10)*                                                                                                                                                                           
|10.7    |  | Companys 1998 Directors Stock Option Plan.(10)*                                                                                                                                                                        
|10.8    |  | Revolving Credit and Term Loan Agreement dated as of March
2, 1999 by and among Mercury Air Group, Inc., The Banks
listed on Schedule 1 thereto, and The Fleet National Bank
f/k/a BankBoston, N.A., as Agent.(11)      
|10.9    |  | First Amendment to Revolving Credit and Term Loan Agreement
dated as of September 10, 1999.(14)                                                                                                                         
|10.10   |  | Second Amendment to Revolving Credit and Term Loan Agreement
dated as of March 31, 2000.(14)                                                                                                                            
|10.11   |  | Third Amendment, Waiver and Consent to Revolving Credit and
Term Loan Agreement dated as of August 11, 2000.(14)                                                                                                        
|10.12   |  | The Companys 401(k) Plan consisting of CNA Trust
Corporation. Regional Prototype Defined Contribution Plan
and Trust and Adoption Agreement.(14)*                                                                      
|10.13   |  | Employment Agreement dated July 31, 2000 between the Company
and Dr. Philip J. Fagan.(15)*                                                                                                                              
|10.14   |  | Fourth Amendment to Revolving Credit and Term Loan Agreement
dated as of November 14, 2000.(16)                                                                                                                         
|10.15   |  | Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term
Incentive Option Plan as of August 22, 2000.(16)*                                                                                                             
|10.16   |  | Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors
Stock Option Plan as of August 22, 2000.(16)*                                                                                                                 
|10.17   |  | Limited Waiver letter Agreement to Revolving Credit and Term
Loan Agreement dated as of September 21, 2001.(18)                                                                                                         
|10.18   |  | Fifth Amendment to Revolving Credit and Term loan Agreement
dated as of September 21, 2001.(18)                                                                                                                         
|10.19   |  | Limited Consent letter Agreement to Revolving Credit and
Term Loan Agreement dated as of September 30, 2001.(19)                                                                                                        
|10.20   |  | 2001 Mercury Air Group, Inc. Stock Incentive Plan.(20)                                                                                                                                                                  
|10.21   |  | Limited waiver and Consent to Revolving Credit and Term Loan
Agreement dated as of December 31, 2001.(21)                                                                                                               
|10.22   |  | 2002 Management Stock Purchase Plan.(22)                                                                                                                                                                                
|10.23   |  | Amended and Restated Employment Agreement dated May 22, 2002
between Mercury Air Group, Inc. and Joseph A, Czyzyk.(22)*                                                                                                 

26



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##### Table of Contents



|        |  |                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                      
|No.     |  | Description                                                                                                                                          
|        |  |                                                                                                                                                      
|10.24   |  | Employment Agreement dated May 22, 2002 between Mercury Air
Group, Inc. and Wayne J. Lovett.(22)*                                                    
|10.25   |  | Employment Agreement dated May 22, 2002 between Mercury Air
Group, Inc. and John Enticknap.(22)*                                                     
|10.26   |  | Employment Agreement dated May 22, 2002 between Mercury Air
Group, Inc. and Mark Coleman.(22)*                                                       
|10.27   |  | Employment Agreement dated May 22, 2002 between Mercury Air
Group, Inc. and Steven S. Antonoff.(22)*                                                 
|10.28   |  | Employment Agreement dated May 22, 2002 between Mercury Air
Group, Inc. and Robert Schlax.(22)*                                                      
|10.29   |  | Limited waiver and Consent to Revolving Credit and Term Loan
Agreement dated as of June 27, 2002.(24)                                                
|10.30   |  | Sale-Leaseback agreement made by and between CFK Realty
Partners, LLC and Mercury air Group, Inc. dated December 15,
2001.(24)                       
|10.31   |  | Amendment to Sale-Leaseback agreement made by and between
CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                   
|10.32   |  | Promissory Note by CFK Partners, LLC in favor of Mercury Air
Group, Inc.(24)                                                                         
|10.33   |  | Limited Waiver and Consent to Revolving Credit and Term Loan
Agreement dated as June 27, 2002.(24)                                                   
|10.34   |  | Amendment to No. 1 made to Amended and Restated Employment
Agreement dated May 22, 2002 between Mercury Air Group, Inc.
and Joseph A. Czyzyk.(24)*   
|31.1    |  | Section 302 Certification of Chief Executive Officer                                                                                                 
|31.2    |  | Section 302 Certification of Chief Financial Officer                                                                                                 
|32.1    |  | Section 906 Certification of Chief Executive Officer                                                                                                 
|32.2    |  | Section 906 Certification of Chief Financial Officer                                                                                                 
|99.1    |  | Partnership Agreement dated as of July 27, 2000 of CFK
Partners by and among Philip J. Fagan, M.D., Frederick H.
Kopko, Jr. and Joseph A. Czyzyk.(13)



---



|* |  | Denotes managements contract or compensation plan or arrangement.
|- |  | ------------------------------------------------------------------



|(1) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 10, 1993 Annual Meeting of Shareholders and is
incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and are
incorporated herein by reference. 
|   
|(3) |  | All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-39044 on Form S-2 and are incorporated
herein by reference.                    
|   
|(4) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 2, 1992 Annual Meeting of Shareholders.                                         
|   
|(5) |  | All such documents were previously filed as Exhibits to the Companys
Registration Statement No. 33-65085 on Form S-1 and are incorporated herein
by reference.                    
|   
|(6) |  | All such documents were previously filed as Exhibits to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and are
incorporated herein by reference. 
|   
|(7) |  | All such documents were previously filed as Exhibits to the Companys
Report on Form 8-K filed September 13, 1996 and are incorporated herein by
reference.                        
|   
|(8) |  | Such document was previously filed as an Exhibit to the Companys Annual
Report on Form 10-K for the year ended June 30, 1997 and is incorporated
herein by reference.             

27



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##### Table of Contents





|(9)  |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1998 and is
incorporated herein by reference.        
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(10) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the December 3, 1998 Annual Meeting of Shareholders and
incorporated herein by reference.     
|    
|(11) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.    
|    
|(12) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 1999 and is
incorporated herein by reference.        
|    
|(13) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on August 11, 2000 and is incorporated herein by
reference.                            
|    
|(14) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2000 and is
incorporated herein by reference.        
|    
|(15) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference.
|    
|(16) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and
incorporated herein by reference. 
|    
|(17) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference.    
|    
|(18) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2001 and is
incorporated herein by reference.        
|    
|(19) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference.
|    
|(20) |  | Such document was previously filed as Appendix A to the Companys Proxy
Statement for the November 7, 2001 Annual Meeting of Shareholders and
incorporated herein by reference.     
|    
|(21) |  | All such documents were previously filed as an Exhibit to the Companys
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001 and
incorporated herein by reference. 
|    
|(22) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on June 5, 2002 and is incorporated herein by
reference.                               
|    
|(23) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on July 11, 2002 and is incorporated herein by
reference.                              
|    
|(24) |  | All such documents were previously filed as an Exhibit to the Companys
Annual Report on Form 10-K for the year ended June 30, 2002 and is
incorporated herein by reference         
|    
|(25) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on December 7,2002 and is incorporated herein by
reference                             
|    
|(26) |  | Such document was previously filed as an Exhibit to the Companys current
Report on Form 8-K on December 30, 2002 and is incorporated herein by
reference                           



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

28



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##### Table of Contents



A report on Form 8-K, dated December 7, 2002, reported on Items 5 and 7,
as to the adoption of amended and restated bylaws. No financial statements were
filed with this report.

A report on Form 8-K, dated December 30, 2002, reported on Items 5 and 7,
as to the Company entering into a refinancing agreement with Foothill Capital
Corporation and revising its subordinated loan facility with J.H. Whitney Co.
Mezzanine Fund. No financial statements were filed with this report.

29



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##### Table of Contents






SIGNATURES

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

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

Date: January 9, 2004

30