##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | Quarterly report pursuant to section 13
    or 15(d) of the Securities Exchange Act of 1934 
|          
|           |  | For the quarterly period ended
    December 31, 2002                                        
|          
|o          |  | Transition report pursuant to section 13
    or 15(d) of the Securities Exchange Act of 1934
|          
|           |  | For the Transition period
    from           to                                             

Commission File No. 1-7134



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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
    incorporation or organization)                 |  | (I.R.S. Employer
    Identification Number)
|                                                                                  
|5456 McConnell Avenue, Los Angeles, CA(Address of principal executive
    offices) |  | 90066(Zip Code)                            

(310) 827-2737

(Registrants telephone number, including
area code)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate 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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---

TABLE OF CONTENTS



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



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##### Table of Contents






Item 1.     Financial
Statements

MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |            |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                                                                                                                                   |                                                                                                                                      | December 31,               |             | June 30,  
|                                                                                                                                                   |                                                                                                                                      | 2002                       |             | 2002      
|                                                                                                                                                   |                                                                                                                                      |                            |             |           
|                                                                                                                                                   |                                                                                                                                      |                           
|                                                                                                                                                   |                                                                                                                                      | (Unaudited)               
|ASSETS                                                                                                                                             |                                                                                                                                      |                            |             |            |             |   |             |           
|CURRENT ASSETS:                                                                                                                                    |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   | Cash and cash equivalents                                                                                                            |                            | $           | 4,377,000  |             |   | $           | 5,554,000  |           
|                                                                                                                                                   | 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        |                            |             | 51,297,000 |             |   |             | 46,958,000 |           
|                                                                                                                                                   | Inventories, principally aviation fuel                                                                                               |                            |             | 3,983,000  |             |   |             | 2,985,000  |           
|                                                                                                                                                   | Prepaid expenses and other current assets                                                                                            |                            |             | 3,235,000  |             |   |             | 3,077,000  |           
|                                                                                                                                                   | Note receivable from affiliate                                                                                                       |                            |             | 1,400,000  |             |   |             | 1,400,000  |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | Total current assets       |             |            | 64,292,000  |   |             |            | 63,754,000 | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of
    accumulated depreciation and amortization of $56,420,000 at
    12/31/02 and $53,668,000 at 6/30/02 |                                                                                                                                      |                            | 58,933,000  |            |             |   | 59,286,000  |           
|NOTES RECEIVABLE                                                                                                                                   |                                                                                                                                      |                            | 2,072,000   |            |             |   | 2,158,000   |           
|DEFERRED INCOME TAXES                                                                                                                              |                                                                                                                                      |                            | 764,000     |            |             |   | 770,000     |           
|GOODWILL                                                                                                                                           |                                                                                                                                      |                            | 4,389,000   |            |             |   | 4,389,000   |           
|OTHER INTANGIBLE ASSETS                                                                                                                            |                                                                                                                                      |                            | 1,183,000   |            |             |   | 233,000     |           
|OTHER ASSETS                                                                                                                                       |                                                                                                                                      |                            | 5,766,000   |            |             |   | 4,096,000   |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | $                          | 137,399,000 |            |             | $ | 134,686,000 |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                           |                                                                                                                                      |                            |             |            |             |   |             |           
|CURRENT LIABILITIES:                                                                                                                               |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   | Accounts payable                                                                                                                     |                            | $           | 35,162,000 |             |   | $           | 35,085,000 |           
|                                                                                                                                                   | Accrued expenses and other current liabilities                                                                                       |                            |             | 6,363,000  |             |   |             | 8,459,000  |           
|                                                                                                                                                   | Current portion of long-term debt (Note 5)                                                                                           |                            |             | 4,325,000  |             |   |             | 14,677,000 |           
|                                                                                                                                                   | Senior Subordinated Note, current (Note 5)                                                                                           |                            |             |            |             |   |             | 23,179,000 |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | Total current liabilities  |             |            | 45,850,000  |   |             |            | 81,400,000 | 
|LONG-TERM DEBT (Note 5)                                                                                                                            |                                                                                                                                      |                            | 29,178,000  |            |             |   | 14,351,000  |           
|SENIOR SUBORDINATED NOTE (Note 5)                                                                                                                  |                                                                                                                                      |                            | 23,355,000  |            |             |   |             |           
|DEFERRED GAIN                                                                                                                                      |                                                                                                                                      |                            | 2,106,000   |            |             |   | 2,146,000   |           
|DEFERRED RENT                                                                                                                                      |                                                                                                                                      |                            | 2,200,000   |            |             |   | 1,943,000   |           
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                                                             |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | Total liabilities          |             |            | 102,689,000 |   |             |            | 99,840,000 | 
|PREFERRED STOCK, Series A  $.01
    par value; authorized 1,000,000 shares; outstanding 462,627
    shares at 12/31/02 (Note 6)                   |                                                                                                                                      |                            | 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 shares at
    12/31/02; 6,541,699 at 6/30/02 |                            |             | 65,000     |             |   |             | 65,000     |           
|                                                                                                                                                   | Additional paid-in capital                                                                                                           |                            |             | 21,634,000 |             |   |             | 21,419,000 |           
|                                                                                                                                                   | Retained earnings                                                                                                                    |                            |             | 16,743,000 |             |   |             | 17,751,000 |           
|                                                                                                                                                   | Accumulated other comprehensive loss
    (Note 10)                                                                                   |                            |             | (361,000   | )           |   |             | (316,000   | )         
|                                                                                                                                                   | Notes receivable from sale of stock                                                                                                  |                            |             | (3,834,000 | )           |   |             | (4,073,000 | )         
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | Total stockholders equity |             |            | 34,247,000  |   |             |            | 34,846,000 | 
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           
|                                                                                                                                                   |                                                                                                                                      | $                          | 137,399,000 |            |             | $ | 134,686,000 |           
|                                                                                                                                                   |                                                                                                                                      |                            |             |            |             |   |             |           

See accompanying notes to consolidated financial
statements

2



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |           | 
|------------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------------------------------------------- | ----------- | ------------------ | ---------- | ---- | ----------- | ----------- | ---------- | - | ----------- | ---------- | --------- | - | ---------- | ---------- | --------- | 
|                                                                                            |                                      |                                                            |             |                   
|                                                                                            |                                      | Six Months Ended                                           |             | Three Months Ended
|                                                                                            |                                      | December 31,                                               |             | December 31,      
|                                                                                            |                                      |                                                            |             |                   
|                                                                                            |                                      | 2002                                                       |             | 2001               |            | 2002 |             | 2001       
|                                                                                            |                                      |                                                            |             |                    |            |      |             |            
|                                                                                            |                                      |                                                           
|                                                                                            |                                      | (Unaudited)                                               
|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                   |                                                            |             | 52,542,000         |            |      |             | 50,932,000  |            |   |             | 26,746,000 |           |   |            | 25,193,000 |          
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                      |                                                            | 208,789,000 |                    |            |      | 180,315,000 |             |            |   | 106,959,000 |            |           |   | 84,287,000 |           
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                      | Gross Margin (Excluding depreciation and
    amortization) |             |                    | 13,068,000 |      |             |             | 15,528,000 |   |             |            | 7,003,000 |   |            |            | 7,804,000 | 
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Expenses (Income):                                                                          |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Selling, general and administrative  |                                                            |             | 5,459,000          |            |      |             | 4,738,000   |            |   |             | 2,760,000  |           |   |            | 2,778,000  |          
|                                                                                            | Provision for bad debts              |                                                            |             | 759,000            |            |      |             | 772,000     |            |   |             | 407,000    |           |   |            | 187,000    |          
|                                                                                            | Depreciation and amortization        |                                                            |             | 4,004,000          |            |      |             | 4,684,000   |            |   |             | 1,975,000  |           |   |            | 2,380,000  |          
|                                                                                            | Interest expense                     |                                                            |             | 2,791,000          |            |      |             | 2,991,000   |            |   |             | 1,471,000  |           |   |            | 1,465,000  |          
|                                                                                            | Costs and expenses of stock offering |                                                            |             |                    |            |      |             | 985,000     |            |   |             |            |           |   |            | 985,000    |          
|                                                                                            | Loss on sale of property             |                                                            |             |                    |            |      |             | 71,000      |            |   |             |            |           |   |            | 71,000     |          
|                                                                                            | Debt extinguishment costs            |                                                            |             | 1,733,000          |            |      |             |             |            |   |             | 1,208,000  |           |   |            |            |          
|                                                                                            | Interest income                      |                                                            |             | (85,000            | )          |      |             | (28,000     | )          |   |             | (15,000    | )         |   |            | (11,000    | )        
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                      |                                                            | 14,661,000  |                    |            |      | 14,213,000  |             |            |   | 7,806,000   |            |           |   | 7,855,000  |           
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|(Loss) Income from Continuing Operations Before
    Provision for Income Taxes              |                                      |                                                            | (1,593,000  | )                  |            |      | 1,315,000   |             |            |   | (803,000    | )          |           |   | (51,000    | )         
|(Benefit from) Provision for Income Taxes (Note 3)                                          |                                      |                                                            | (621,000    | )                  |            |      | 513,000     |             |            |   | (313,000    | )          |           |   | (20,000    | )         
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|(Loss) Income from Continuing Operations                                                    |                                      |                                                            | (972,000    | )                  |            |      | 802,000     |             |            |   | (490,000    | )          |           |   | (31,000    | )         
|Loss from Discontinued Operations net of income
    tax benefit of $27,000 in 2001 (Note 2) |                                      |                                                            |             |                    |            |      | (42,000     | )           |            |   |             |            |           |   |            |           
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Net (Loss) income                                                                           |                                      | $                                                          | (972,000    | )                  |            | $    | 760,000     |             |            | $ | (490,000    | )          |           | $ | (31,000    | )         
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|Net (Loss) income Per Common Share (Note 7):                                                |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Basic:                               |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |          
|                                                                                            |                                      | From Continuing Operations                                 |             | $                  | (0.15      | )    |             | $           | 0.12       |   |             | $          | (0.08     | ) |            | $          | 0.00      | 
|                                                                                            |                                      | (Loss) from Discontinued Operations                        |             |                    |            |      |             |             | (0.01      | ) |             |            |           |   |            |            |           | 
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                      | Net (Loss) Income                                          |             | $                  | (0.15      | )    |             | $           | 0.11       |   |             | $          | (0.08     | ) |            | $          | 0.00      | 
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            | Diluted:                             |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |            |          
|                                                                                            |                                      | From Continuing Operations                                 |             | $                  | (0.15      | )    |             | $           | 0.12       |   |             | $          | (0.08     | ) |            | $          | 0.00      | 
|                                                                                            |                                      | (Loss) Income from Discontinued Operations                 |             |                    |            |      |             |             | (0.01      | ) |             |            |           |   |            |            |           | 
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           
|                                                                                            |                                      | Net (Loss) Income                                          |             | $                  | (0.15      | )    |             | $           | 0.11       |   |             | $          | (0.08     | ) |            | $          | 0.00      | 
|                                                                                            |                                      |                                                            |             |                    |            |      |             |             |            |   |             |            |           |   |            |           

See accompanying notes to consolidated financial
statements

3



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |            |             |            |  
|---------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------- | ----------- | ---------- | ---------- | --------- | ---------- | ----------- | ---------- | -
|                                                                                   |                                                                |                                                                   
|                                                                                   |                                                                | Six Months Ended                                                  
|                                                                                   |                                                                | December 31,                                                      
|                                                                                   |                                                                |                                                                   
|                                                                                   |                                                                | 2002                                                               |                                                          | 2001       
|                                                                                   |                                                                |                                                                    |                                                          |            
|                                                                                   |                                                                |                                                                   
|                                                                                   |                                                                | (Unaudited)                                                       
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                                          |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   | Net (Loss) income                                              |                                                                    | $                                                        | (972,000    | )          |            | $         | 760,000    |            
|                                                                                   | Less: Loss from discontinued operations                        |                                                                    |                                                          |            |            |            |           | (42,000    | )          
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   | (Loss) Income from continuing operations                       |                                                                    |                                                          | (972,000    | )          |            |           | 802,000    |            
|                                                                                   | Adjustments to derive cash flow from Operating
    activities: |                                                                    |                                                          |             |            |            |           |            |            
|                                                                                   |                                                                | Bad debt expense                                                   |                                                          |             | 759,000    |            |           |            | 772,000     |           
|                                                                                   |                                                                | Depreciation and amortization                                      |                                                          |             | 4,004,000  |            |           |            | 4,684,000   |           
|                                                                                   |                                                                | Deferred income taxes                                              |                                                          |             | 6,000      |            |           |            | 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        |                                                          |             | 239,000    |            |           |            |            |           
|                                                                                   |                                                                | 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                                      |                                                          |             | (40,000    | )          |           |            |            |           
|                                                                                   |                                                                | Changes in operating assets and liabilities:                       |                                                          |             |            |            |           |            |             |           
|                                                                                   |                                                                | Trade and other accounts receivable                                |                                                          |             | (5,098,000 | )          |           |            | 8,696,000   |           
|                                                                                   |                                                                | Inventories                                                        |                                                          |             | (998,000   | )          |           |            | 933,000     |           
|                                                                                   |                                                                | Prepaid expenses and other current assets                          |                                                          |             | (158,000   | )          |           |            | (2,564,000  | )         
|                                                                                   |                                                                | Accounts payable                                                   |                                                          |             | 77,000     |            |           |            | (10,656,000 | )         
|                                                                                   |                                                                | Accrued expenses and other current liabilities                     |                                                          |             | (2,097,000 | )          |           |            | (1,412,000  | )         
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   |                                                                |                                                                    | Net cash (used in) provided by operating
    activities  |             |            | (1,389,000 | )         |            |             | 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 ( used in )provided by investing
    activities |             |            | (814,000   | )         |            |             | 367,000    |  
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                                          |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   | Proceeds from revolving credit facility                        |                                                                    |                                                          | 12,775,000  |            |            |           |            |            
|                                                                                   | Reduction of debt instruments                                  |                                                                    |                                                          | (11,938,000 | )          |            |           | (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 (Note 6)             |                                                                    |                                                          | 259,000     |            |            |           |            |            
|                                                                                   | Proceeds from exercise of stock options                        |                                                                    |                                                          | 58,000      |            |            |           |            |            
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   |                                                                |                                                                    | Net cash provided by (used in) financing
    activities  |             |            | 1,071,000  |           |            |             | (7,081,000 | )
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|Effect of exchange rate changes on cash                                            |                                                                |                                                                    | (45,000                                                  | )           |            |            |           |           
|NET (DECREASE)INCREASE IN CASH AND CASH
    EQUIVALENTS FROM CONTINUING OPERATIONS |                                                                |                                                                    | (1,177,000                                               | )           |            |            | 4,967,000 |           
|NET CASH PROVIDED BY DISCONTINUED
    OPERATIONS                                   |                                                                |                                                                    |                                                          |             |            |            | 4,296,000 |           
|CASH AND CASH EQUIVALENTS, beginning of
    period                                 |                                                                |                                                                    | 5,554,000                                                |             |            |            | 3,886,000 |           
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|CASH AND CASH EQUIVALENTS, end of
    period                                       |                                                                | $                                                                  | 4,377,000                                                |             |            | $          | 3,215,000 |           
|                                                                                   |                                                                |                                                                    |                                                          |             |            |            |           |           
|CASH PAID DURING THE PERIOD:                                                       |                                                                |                                                                    |                                                          |             |            |            |           |           
|                                                                                   | Interest                                                       |                                                                    | $                                                        | 2,506,000   |            |            | $         | 2,943,000  |            
|                                                                                   | Income taxes paid                                              |                                                                    | $                                                        | 4,670,000   |            |            | $         | 348,000    |            

See accompanying notes to consolidated financial
statements

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 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).

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

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

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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

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

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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
(loss) income 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 (Loss) Income as Reported                            |  | $              | (972,000 | )              |  | $              | 760,000 |                |  | $ | (490,000 | ) |  | $ | (31,000 | )
|Goodwill amortization                                    |  |                |          |                |  |                | 184,000 |                |  |   |          |   |  |   | 92,000  |  
|                                                         |  |                |          |                |  |                |         |                |  |   |          |   |  |   |         |  
|Net (Loss) Income as adjusted                            |  | $              | (972,000 | )              |  | $              | 944,000 |                |  | $ | (490,000 | ) |  | $ | 61,000  |  
|                                                         |  |                |          |                |  |                |         |                |  |   |          |   |  |   |         |  
|Fully diluted (loss) earnings per share, as
    adjusted |  | $              | (0.15    | )              |  | $              | 0.14    |                |  | $ | (0.08    | ) |  | $ | 0.01    |  
|Fully diluted (loss) earning per share, as
    reported  |  | $              | (0.15    | )              |  | $              | 0.11    |                |  | $ | (0.08    | ) |  | $ | 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

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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.

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.

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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.

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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 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

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MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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

Note 7  Earnings Per
Share

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

11



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

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               |  | $              | (972,000   | )              |  | $ | (490,000 | )
|Net loss  pro forma                 |  | $              | (1,100,000 | )              |  | $ | (554,000 | )
|Basic loss per share  as reported   |  | $              | (0.15      | )              |  | $ | (0.08    | )
|Basic loss per share  pro forma     |  | $              | (0.17      | )              |  | $ | (0.09    | )
|Diluted loss per share  as reported |  | $              | (0.15      | )              |  | $ | (0.08    | )
|Diluted loss per share  pro forma   |  | $              | (0.17      | )              |  | $ | (0.09    | )

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 |  |            |        |            |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                        |  | $          | 75,041 |            |  | $                      | 23,882 |            |  | $           | 9,154  |       |  | $ | 6,314  |  |  | $ | (429   | ) |  | $ | 113,962 | 
|Gross Margin                    |  |            | 1,451  |            |  |                        | 2,941  |            |  |             | 1,415  |       |  |   | 1,196  |  |  |   |        |   |  |   | 7,003   | 
|Depreciation and Amortization   |  |            | 54     |            |  |                        | 1,328  |            |  |             | 546    |       |  |   | 90     |  |  |   | (43    | ) |  |   | 1,975   | 
|Capital Expenditures            |  |            | 6      |            |  |                        | 2,652  |            |  |             |        |       |  |   |        |  |  |   | 283    |   |  |   | 2,941   | 
|Segment Assets                  |  |            | 34,346 |            |  |                        | 60,244 |            |  |             | 16,241 |       |  |   | 11,564 |  |  |   | 15,004 |   |  |   | 137,399 | 
|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 | 

12



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

|                                       |  |            |         |            |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|-------------------------------------- |  | ---------- | ------- | ---------- |  | ---------------------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                       |  |            |         |            |  |                        |        | Government |  | Corporate   |        |      
|                                       |  |            |         | Fixed Base |  | Cargo                  |        | Contract   |  | or          |        |      
|                                       |  | Fuel Sales |         | Operations |  | Operations             |        | Services   |  | Unallocated |        | Total
|                                       |  |            |         |            |  |                        |        |            |  |             |        |      
|                                       |  |            |         |            |  |                        |        |            |  |            
|                                       |  |            |         |            |  | (Dollars in Thousands) |        |            |  |            
|Six Months Ended December 31,
    2002 |  |            |         |            |  |                        |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                               |  | $          | 145,614 |            |  | $                      | 47,708 |            |  | $           | 16,444 |       |  | $ | 12,520 |  |  | $ | (429   | ) |  | $ | 221,857 | 
|Gross Margin                           |  |            | 3,071   |            |  |                        | 5,914  |            |  |             | 1,934  |       |  |   | 2,149  |  |  |   |        |   |  |   | 13,068  | 
|Depreciation and Amortization          |  |            | 108     |            |  |                        | 2,581  |            |  |             | 1,092  |       |  |   | 181    |  |  |   | 42     |   |  |   | 4,004   | 
|Capital Expenditures                   |  |            | 6       |            |  |                        | 3,176  |            |  |             | 65     |       |  |   |        |  |  |   | 304    |   |  |   | 3,551   | 
|Segment Assets                         |  |            | 34,346  |            |  |                        | 60,244 |            |  |             | 16,241 |       |  |   | 11,564 |  |  |   | 15,004 |   |  |   | 137,399 | 
|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; total bad debt expense was $407,000 and
$187,000 for the quarter ended December 31, 2002 and
December 3, 2001, respectively. Bad debt expense for fuel
sales was approximately $632,000 and $572,000; total bad debt
expense was $759,000 and $772,000 for the six months ended
December 31, 2002 and December 31, 2001, respectively.

Note 10  Comprehensive
Income

Comprehensive (Loss) income is summarized as
follows:

|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  
|--------------------------------------- |  | ---------------- | ---------- | ------------------ |  | ---- | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                        |  |                  |            |                   
|                                        |  | Six Months Ended |            | Three Months Ended
|                                        |  | December 31,     |            | December 31,      
|                                        |  |                  |            |                   
|                                        |  | 2002             |            | 2001               |  | 2002 |         | 2001
|                                        |  |                  |            |                    |  |      |         |     
|Net (Loss) Income                       |  | $                | (972,000   | )                  |  | $    | 760,000 |      |  | $ | (490,000 | ) |  | $ | (31,000 | )
|Foreign Currency Translation Adjustment |  |                  | (45,000    | )                  |  |      |         |      |  |   | (6,000   | ) |  |   |         |  
|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  
|Comprehensive (Loss) Income             |  | $                | (1,017,000 | )                  |  | $    | 760,000 |      |  | $ | (496,000 | ) |  | $ | (31,000 | )
|                                        |  |                  |            |                    |  |      |         |      |  |   |          |   |  |   |         |  

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 Partners, LLC 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 Partners, LLC can
elect to extend the maturity date in one year increments through
December 31, 2004. The note had an original maturity date
of December 31, 2002. In early December 2002, the Company
received notification from CFK Partners, LLC that it was
exercising its right to extend the maturity date of the note for
an additional 1 year period. For the three and six month
period ended December 31, 2002, the Company has expended
$89,000

13



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  Continued

and $275,000, respectively, for leasehold
improvements on its corporate headquarters. This amount will be
amortized over the office lease term.

The Company and its Chairman (the
Members) each own a 50% interest in MercMed, LLC
(MercMed). MercMed was formed to own and operate a
corporate aircraft. In early April, 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.

14



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##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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                          |       | 2001                            |  | 2002   |       | 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(1):             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |     |  |  |  |      |  
|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             |  |        | 1.9  |          |  |        | 11.8 |          |  |        | 1.2  |          |  |        | 7.9  |          |  |   | 1.4 |  |  |  | 15.5 |   |  |   | 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           |  | $      | 13.0 |          |  |        | 5.9  | %        |  | $      | 15.5 |          |  |        | 7.9  | %        |  | $ | 7.0 |  |  |  | 6.1  | % |  | $ | 7.8 |  |  |  | 8.5  | %
|                             |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |     |  |  |  |      |   |  |   |     |  |  |  |      |  

|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |   |      |   |  |  |      |  
|------------------------------------------------------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | ------ | ---- | -------- |  | - | ---- | - |  |  | ---- | -- |  | - | ---- | - |  |  | ---- | -
|                                                        |  |        |      | % of     |  |        |      | % of     |  |        |      | % of     |  |        |      | % of    
|                                                        |  |        |      | Total    |  |        |      | Total    |  |        |      | Total    |  |        |      | Total   
|                                                        |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues |  | Amount |      | Revenues
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |         
|Selling, general and administrative                     |  | $      | 5.4  |          |  |        | 2.5  | %        |  | $      | 4.7  |          |  |        | 2.4  | %        |  | $ | 2.8  |   |  |  | 2.4  | %  |  | $ | 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  |          |  |   | 1.9  |   |  |  | 1.7  |    |  |   | 2.4  |   |  |  | 2.6  |  
|Interest expense and other                              |  |        | 2.7  |          |  |        | 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                       |  |        | (1.6 | )        |  |        | (0.7 | )        |  |        | 1.3  |          |  |        | 0.7  |          |  |   | (0.8 | ) |  |  | (0.7 | )  |  |   | (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 |  |        | (1.0 | )        |  |        | (0.4 | )        |  |        | 0.8  |          |  |        | 0.4  |          |  |   | (0.5 | ) |  |  | (0.4 | )  |  |   | (0.1 | ) |  |  | (0.0 | )
|Loss from discontinued operations                       |  |        |     |          |  |        |     |          |  |        | (0.1 | )        |  |        | (0.0 | )        |  |   |     |   |  |  |     |    |  |   |     |   |  |  |     |  
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |   |      |   |  |  |      |  
|Net (Loss) Income                                       |  | $      | (1.0 | )        |  |        | (0.4 | )%       |  | $      | 0.8  |          |  |        | 0.4  | %        |  | $ | (0.5 | ) |  |  | (0.4 | )% |  | $ | (0.1 | ) |  |  | 0.0  | %
|                                                        |  |        |      |          |  |        |      |          |  |        |      |          |  |        |      |          |  |   |      |   |  |  |      |    |  |   |      |   |  |  |      |  



---



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

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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
$7.0 million, a decrease of $0.8 million or 10.3% 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
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 $1.4 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.

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.

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Selling, general and administrative expenses in
the second quarter were $2.8 million, essentially unchanged
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
$1.9 million in the current period as compared to
$2.4 million last year. The reduction is primarily due to
the sale of corporate headquarters in January 2002 and the sale
of the Bedford FBO in June 2002. The current period 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. 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.

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.

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 39% of pre-tax
loss for both periods 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
$13.0 million, a decrease of $2.5 million or 15.8%
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

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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 $1.9 million, an increase
of $0.7 million from last years results, primarily
due to higher margins in the cargo handling operations partially
offset by higher start-up expenses for the Mercury World Cargo
operations 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.

The Companys Selling, general and
administrative expenses for the current period were
$5.4 million, an increase of $0.7 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 corporate headquarters in January 2002 and the sale
of the Bedford FBO in June 2002. The current period also
reflects the non-amortization of goodwill for fiscal year 2003
which resulted in a $0.2 million decrease in amortization
from the prior year.

Interest expense in the current period was
$2.7 million, a decrease of $0.3 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.

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

Liquidity and Capital Resources:

As of 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 $1.4 million comprised of cash
generated of $6.9 million from earnings, adjusted for
non-cash items, less $8.3 million for an increase in net
working capital. The increase in working capital was primarily
due to an increase in Mercfuels trade receivables 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
$1.1 million in cash primarily due to a net draw down on
the revolving credit facility. In addition the Company generated
$0.3 million and $0.1 million from the issuance of
preferred stock and exercise of stock options, respectively. The
issuance of the Preferred Stock occurred after the Company was
unable to draw-down on the previous revolving credit facility.

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

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

The 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

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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.

20



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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

21



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##### Table of Contents



cause actual results to differ materially from
those estimated by Mercury include, but are not limited to,
risks associated with acquisitions, the financial condition of
customers, non-renewal of contracts, government regulation, as
well as operating risks, general conditions in the economy and
capital markets, and other factors which may be identified from
time-to-time in Mercurys Securities and Exchange
Commission filings and other public announcements.





PART II  OTHER
INFORMATION




Item 1.     Legal
Proceedings

In 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

22



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##### Table of Contents



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

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.

23



---



##### Table of Contents






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 | 

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)                                                                                                                                                                                            

24



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                     
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 4.3   |             |  | Amendment No. 1 dated as of
    September 30, 2000 by and between J.H. Whitney Mezzanine,
    L.P. and Mercury Air Group, Inc. to the Securities Agreement.(16)                                                                     
|        | 4.4   |             |  | Waiver and Consent Agreement dated as of
    December 29, 2000 among Mercury Air Group, Inc. and J.H.
    Whitney Mezzanine Fund, L.P.(17)                                                                                          
|        | 4.5   |             |  | Waiver and Consent Agreement dated as of
    July 2, 2001 among Mercury Air Group, Inc. and J.H. Whitney
    Mezzanine Fund, L.P.(18)                                                                                               
|        | 4.6   |             |  | Waiver Agreement dated as of September 25,
    2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine
    Fund, L.P.(18)                                                                                                     
|        | 4.7   |             |  | Amendment No. 2 dated as of
    September 30, 2001 by and between J.H.Whitney Mezzanine
    Fund, L.P. and Mercury Air Group, Inc. to the Securities
    Purchase Agreement.(19)                                                    
|        | 4.8   |             |  | Waiver Agreement dated as of November 26,
    2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine,
    L.P.(21)                                                                                                           
|        | 4.9   |             |  | Waiver Agreement dated as of December 21,
    2001 among Mercury Air Group, inc. and J.H. Whitney Mezzanine,
    L.P.(21)                                                                                                           
|        | 4.10  |             |  | Waiver Agreement dated as of June 26, 2002
    among Mercury Air Group, inc. and J.H.Whitney Mezzanine, L.P.(24)                                                                                                                    
|        | 4.11  |             |  | Amendment No. 3 to Securities Purchase
    Agreement by and between Mercury Air Group, Inc., and J.H.
    Whitney Mezzanine Fund, L.P. dated as of December 30,
    2002.(26)                                                       
|        | 4.12  |             |  | Amended and Restated J.H. Whitney Mezzanine Fund,
    L.P. Warrant dated September 10, 1999.(26)                                                                                                                                    
|        | 4.13  |             |  | Amended and Restated J. H. Whitney Mezzanine
    Fund, L.P. Senior Subordinated Promissory Note dated September
    10, 1999.(26)                                                                                                   
|        | 4.14  |             |  | Security Agreement by and between Mercury Air
    Group, Inc. and each of its Subsidiaries hereto as Obligors and
    J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of
    December 30, 2002.(26)                      
|        | 4.15  |             |  | Subordination Agreement among J.H. Whitney
    Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and
    Mercury Air Group, Inc. and Certain of its subsidiaries
    signatory thereto, dated as of December 30, 2002.(26)
|        | 4.16  |             |  | Loan and Security Agreement by and among Foothill
    Capital Corporation and Mercury Air Group, Inc. and certain
    subsidiaries signatory thereto, dated as of December 30,
    2002.(26)                                        
|        | 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)                                                                                                            

25



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##### Table of Contents



|        |       |             |  |                                                                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 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)*                              
|        | 10.24 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Wayne J. Lovett.(22)*                                                        
|        | 10.25 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and John Enticknap.(22)*                                                         
|        | 10.26 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Mark Coleman.(22)*                                                           
|        | 10.27 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Steven S. Antonoff.(22)*                                                     
|        | 10.28 |             |  | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Robert Schlax.(22)*                                                          
|        | 10.29 |             |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of June 27, 2002.(24)                                                    
|        | 10.30 |             |  | Sale-Leaseback agreement made by and between CFK
    Realty Partners, LLC and Mercury air Group, Inc. dated
    December 15, 2001.(24)                       
|        | 10.31 |             |  | Amendment to Sale-Leaseback agreement made by and
    between CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                       
|        | 10.32 |             |  | Promissory Note by CFK Partners, LLC in favor of
    Mercury Air Group, Inc.(24)                                                                             
|        | 10.33 |             |  | Limited Waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as June 27, 2002.(24)                                                       
|        | 10.34 |             |  | Amendment to No. 1 made to Amended and
    Restated Employment Agreement dated May 22, 2002 between
    Mercury Air Group, Inc. and Joseph A. Czyzyk.(24)*   
|        | 99.1  |             |  | Partnership Agreement dated as of July 27,
    2000 of CFK Partners by and among Philip J. Fagan, M.D.,
    Frederick H. Kopko, Jr. and Joseph A. Czyzyk.(13)
|        | 99.2  |             |  | Certification pursuant to 18 U.S.C.
    Section 1350, As adopted pursuant to Section 906 of
    the Sarbanes-Oxley.                                          

26



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##### Table of Contents





---



|  |                                                                       
|- | ----------------------------------------------------------------------
|* | 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. 33-65085on Form S-1 and are incorporated herein by
    reference.                     
|   
|(6) | All such documents were previously filed as
    Exhibits to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1996 and are
    incorporated herein by reference. 
|   
|(7) | All such documents were previously filed as
    Exhibits to the Companys Report on Form 8-K filed
    September 13, 1996 and are incorporated herein by reference.                            
|   
|(8) | Such document was previously filed as an Exhibit
    to the Companys Annual Report on Form 10-K for the
    year ended June 30, 1997 and is incorporated herein by
    reference.             
|   
|(9) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 1998 and is incorporated herein
    by reference.       



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

27



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##### Table of Contents





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

(b)     Reports on
Form 8-K:

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.

28



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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: February 14, 2003

29



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##### Table of Contents






CERTIFICATION

I, Joseph Czyzyk, certify that:

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

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

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



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

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



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

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



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

Date: February 14, 2003

30



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##### Table of Contents



CERTIFICATION

I, Robert Schlax, certify that:

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

2.     Based on my
knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this quarterly report, fairly presents
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

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



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

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



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

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



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

Date: February 14, 2003

31