##### Table of Contents









UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | Quarterly report pursuant to section 13 or
    15(d) of the Securities Exchange Act of 1934 
|          
|           |  | For the quarterly period ended
    September 30, 2003                                       
|          
|o          |  | Transition report pursuant to section 13 or
    15(d) of the Securities Exchange Act of 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File No. 1-7134

Mercury Air Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 11-1800515                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|5456 McConnell Avenue
    Los Angeles, CA                          |  | 90066                                      
|(Address of principal executive
    offices)                       |  | (Zip Code)                                 

Registrants telephone number, including
area code:

(310) 827-2737


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

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

|                              |  |                              |           | 
|----------------------------- |  | ---------------------------- | --------- | 
|                              |  | Number of Shares Outstanding
|Title                         |  | as of January 7, 2004       
|                              |  |                             
|Common Stock, $0.01 Par Value |  |                              | 2,954,818 | 



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TABLE OF CONTENTS



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



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






Item 1.     Financial
Statements


MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |            |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------- | ---------- | ----------- |  | ---------- | ---------- | ----------- | 
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | September 30,                                                                          |            | June 30,  
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | 2003                                                                                   |            | 2003      
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | (Unaudited)                                                                            |            |           
|ASSETS                                                                                                                                                                    |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|CURRENT ASSETS:                                                                                                                                                           |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          | Cash and cash equivalents                                                                                                                                                                                                                                      |                                                                                        | $          | 3,490,000  |             |  | $          | 2,802,000  |            
|                                                                                                                                                                          | Trade accounts receivable, net of allowance for
    doubtful accounts of $2,448,000 at September 30, 2003 and
    $2,006,000 at June 30, 2003                                                                                                                  |                                                                                        |            | 48,758,000 |             |  |            | 46,753,000 |            
|                                                                                                                                                                          | Inventories, principally aviation fuel                                                                                                                                                                                                                         |                                                                                        |            | 4,225,000  |             |  |            | 4,422,000  |            
|                                                                                                                                                                          | Prepaid expenses and other current assets                                                                                                                                                                                                                      |                                                                                        |            | 3,708,000  |             |  |            | 5,241,000  |            
|                                                                                                                                                                          | Deferred income taxes                                                                                                                                                                                                                                          |                                                                                        |            | 1,125,000  |             |  |            | 901,000    |            
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | Total current assets                                                                   |            |            | 61,306,000  |  |            |            | 60,119,000  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of
    accumulated depreciation and amortization of $62,058,000 at
    September 30, 2003 and $61,061,000 at June 30, 2003        |                                                                                                                                                                                                                                                                |                                                                                        | 58,048,000 |            |             |  | 58,844,000 |           
|NOTES RECEIVABLE, net of allowance for doubtful
    accounts of $463,000 at September 30, 2003 and $509,000 at
    June 30, 2003                                          |                                                                                                                                                                                                                                                                |                                                                                        | 1,509,000  |            |             |  | 1,815,000  |           
|DEFERRED INCOME TAXES                                                                                                                                                     |                                                                                                                                                                                                                                                                |                                                                                        | 2,282,000  |            |             |  | 2,284,000  |           
|GOODWILL                                                                                                                                                                  |                                                                                                                                                                                                                                                                |                                                                                        | 4,389,000  |            |             |  | 4,389,000  |           
|OTHER INTANGIBLE ASSETS, NET                                                                                                                                              |                                                                                                                                                                                                                                                                |                                                                                        | 958,000    |            |             |  | 1,033,000  |           
|OTHER ASSETS, NET                                                                                                                                                         |                                                                                                                                                                                                                                                                |                                                                                        | 4,205,000  |            |             |  | 4,471,000  |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | TOTAL ASSETS                                                                           |            | $          | 132,697,000 |  |            | $          | 132,955,000 | 
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND STOCKHOLDERS EQUITY                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|CURRENT LIABILITIES:                                                                                                                                                      |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          | Accounts payable                                                                                                                                                                                                                                               |                                                                                        | $          | 34,534,000 |             |  | $          | 34,677,000 |            
|                                                                                                                                                                          | Accrued expenses and other current liabilities                                                                                                                                                                                                                 |                                                                                        |            | 11,095,000 |             |  |            | 10,162,000 |            
|                                                                                                                                                                          | Current portion of long-term debt                                                                                                                                                                                                                              |                                                                                        |            | 4,156,000  |             |  |            | 4,194,000  |            
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | Total current liabilities                                                              |            |            | 49,785,000  |  |            |            | 49,033,000  | 
|LONG-TERM DEBT                                                                                                                                                            |                                                                                                                                                                                                                                                                |                                                                                        | 24,771,000 |            |             |  | 25,501,000 |           
|SENIOR SUBORDINATED NOTE                                                                                                                                                  |                                                                                                                                                                                                                                                                |                                                                                        | 23,489,000 |            |             |  | 23,445,000 |           
|DEFERRED RENT                                                                                                                                                             |                                                                                                                                                                                                                                                                |                                                                                        | 1,728,000  |            |             |  | 1,885,000  |           
|MINORITY INTEREST                                                                                                                                                         |                                                                                                                                                                                                                                                                |                                                                                        | 184,000    |            |             |  | 180,000    |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | Total liabilities                                                                      |            |            | 99,957,000  |  |            |            | 100,044,000 | 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                             |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|MANDATORILY REDEEMABLE PREFERRED STOCK,
    Series A  $0.01 par value; 1,000,000 shares
    authorized; 462,627 shares outstanding at September 30 and
    June 30, 2003 |                                                                                                                                                                                                                                                                |                                                                                        | 490,000    |            |             |  | 481,000    |           
|STOCKHOLDERS EQUITY:                                                                                                                                                     |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          | Preferred Stock  $0.01 par value;
    authorized 2,000,000 shares; no shares outstanding Common Stock
     $0.01 par value; authorized 18,000,000 shares; 3,298,418
    and 3,293,568 shares outstanding at September 30 and
    June 30, 2003, respectively |                                                                                        |            | 33,000     |             |  |            | 33,000     |            
|                                                                                                                                                                          | Additional paid-in capital                                                                                                                                                                                                                                     |                                                                                        |            | 22,509,000 |             |  |            | 22,496,000 |            
|                                                                                                                                                                          | Retained earnings                                                                                                                                                                                                                                              |                                                                                        |            | 13,716,000 |             |  |            | 14,018,000 |            
|                                                                                                                                                                          | Accumulated other comprehensive loss                                                                                                                                                                                                                           |                                                                                        |            | (78,000    | )           |  |            | (86,000    | )          
|                                                                                                                                                                          | Notes receivable from officers                                                                                                                                                                                                                                 |                                                                                        |            | (3,930,000 | )           |  |            | (4,031,000 | )          
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | Total stockholders equity                                                             |            |            | 32,250,000  |  |            |            | 32,430,000  | 
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                | Total liabilities, mandatorily redeemable
    preferred stock and stockholders equity |            | $          | 132,697,000 |  |            | $          | 132,955,000 | 
|                                                                                                                                                                          |                                                                                                                                                                                                                                                                |                                                                                        |            |            |             |  |            |           

See accompanying notes to consolidated financial
statements.

2



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                           |                                       |                                                            |                          |            |           |             |          |            |           |             | 
|------------------------------------------ | ------------------------------------- | ---------------------------------------------------------- | ------------------------ | ---------- | --------- | ----------- | -------- | ---------- | --------- | ----------- | 
|                                           |                                       |                                                           
|                                           |                                       | Three Months Ended                                        
|                                           |                                       | September 30,                                             
|                                           |                                       |                                                           
|                                           |                                       | 2003                                                       |                          | 2002      
|                                           |                                       |                                                            |                          |           
|                                           |                                       |                                                           
|                                           |                                       | (Unaudited)                                               
|Sales and revenues:                        |                                       |                                                            |                          |            |           |             |          |           
|                                           | Sales                                 |                                                            | $                        | 78,576,000 |           |             | $        | 85,450,000 |          
|                                           | Service revenues                      |                                                            |                          | 22,437,000 |           |             |          | 22,445,000 |          
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           |                                       |                                                            | Total sales and revenues |            |           | 101,013,000 |          |            |           | 107,895,000 | 
|                                           |                                       |                                                            |                          |            |           |             |          |           
|Costs and expenses:                        |                                       |                                                            |                          |            |           |             |          |           
|                                           | Cost of sales                         |                                                            |                          | 68,986,000 |           |             |          | 76,034,000 |          
|                                           | Operating expenses                    |                                                            |                          | 25,312,000 |           |             |          | 25,911,000 |          
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           |                                       |                                                            | Total costs and expenses |            |           | 94,298,000  |          |            |           | 101,945,000 | 
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           |                                       | Gross margin (excluding depreciation and
    amortization) |                          |            | 6,715,000 |             |          |            | 5,950,000 |            
|                                           |                                       |                                                            |                          |            |           |             |          |           
|Expenses (income):                         |                                       |                                                            |                          |            |           |             |          |           
|                                           | Selling, general and administrative   |                                                            |                          | 2,275,000  |           |             |          | 2,615,000  |          
|                                           | Provision for bad debts               |                                                            |                          | 383,000    |           |             |          | 352,000    |          
|                                           | Depreciation and amortization         |                                                            |                          | 2,171,000  |           |             |          | 2,051,000  |          
|                                           | Interest expense                      |                                                            |                          | 2,594,000  |           |             |          | 1,384,000  |          
|                                           | Write-off of deferred financing costs |                                                            |                          |            |           |             |          | 500,000    |          
|                                           | Interest income                       |                                                            |                          | (213,000   | )         |             |          | (52,000    | )        
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           |                                       |                                                            | Total expenses (income)  |            |           | 7,210,000   |          |            |           | 6,850,000   | 
|                                           |                                       |                                                            |                          |            |           |             |          |           
|Loss before income tax benefit             |                                       |                                                            | (495,000                 | )          |           |             | (900,000 | )         
|Income tax benefit                         |                                       |                                                            | (193,000                 | )          |           |             | (311,000 | )         
|                                           |                                       |                                                            |                          |            |           |             |          |           
|Net loss                                   |                                       |                                                            | (302,000                 | )          |           |             | (589,000 | )         
|Accrued preferred stock dividends          |                                       |                                                            | (9,000                   | )          |           |             |          |           
|                                           |                                       |                                                            |                          |            |           |             |          |           
|Net loss applicable to common stockholders |                                       | $                                                          | (311,000                 | )          |           | $           | (589,000 | )         
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           | Net loss per common share:            |                                                            |                          |            |           |             |          |            |          
|                                           |                                       | Basic                                                      |                          | $          | (0.09     | )           |          | $          | (0.18     | )          
|                                           |                                       |                                                            |                          |            |           |             |          |           
|                                           |                                       | Diluted                                                    |                          | $          | (0.09     | )           |          | $          | (0.18     | )          
|                                           |                                       |                                                            |                          |            |           |             |          |           

See accompanying notes to consolidated financial
statements.

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MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |           |            |            |  
|-------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------- | ---------- | ---------- | --------- | ---------- | --------- | ---------- | ---------- | -
|                                                         |                                                                |                                                                   
|                                                         |                                                                | Three Months Ended                                                
|                                                         |                                                                | September 30,                                                     
|                                                         |                                                                |                                                                   
|                                                         |                                                                | 2003                                                               |                                                         | 2002      
|                                                         |                                                                |                                                                    |                                                         |           
|                                                         |                                                                |                                                                   
|                                                         |                                                                | (Unaudited)                                                       
|CASH FLOWS FROM OPERATING
    ACTIVITIES:                |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         | Net loss                                                       |                                                                    | $                                                       | (302,000   | )          |           | $          | (589,000  | )         
|                                                         | Adjustments to derive cash flow from operating
    activities: |                                                                    |                                                         |            |            |           |            |           |           
|                                                         |                                                                | Bad debt expense                                                   |                                                         |            | 383,000    |           |            |           | 352,000    |           
|                                                         |                                                                | Depreciation and amortization                                      |                                                         |            | 2,171,000  |           |            |           | 2,051,000  |           
|                                                         |                                                                | Deferred income taxes                                              |                                                         |            | (222,000   | )         |            |           | 1,000      |           
|                                                         |                                                                | Deferred rent                                                      |                                                         |            | (157,000   | )         |            |           | 147,000    |           
|                                                         |                                                                | Compensation expense related to remeasurement of
    stock options |                                                         |            |            |           |            |           | 318,000    |           
|                                                         |                                                                | Expense related to amortization of executive
    stock plan        |                                                         |            | 101,000    |           |            |           | 102,000    |           
|                                                         |                                                                | Amortization of senior subordinated note discount                  |                                                         |            | 44,000     |           |            |           | 49,000     |           
|                                                         |                                                                | Loss on retirement of assets                                       |                                                         |            |            |           |            |           | 41,000     |           
|                                                         |                                                                | Minority interest                                                  |                                                         |            | 4,000      |           |            |           |            |           
|                                                         | Changes in operating assets and liabilities:                   |                                                                    |                                                         |            |            |           |            |           |           
|                                                         |                                                                | Trade and other accounts receivable                                |                                                         |            | (2,388,000 | )         |            |           | 562,000    |           
|                                                         |                                                                | Inventories                                                        |                                                         |            | 197,000    |           |            |           | (3,576,000 | )         
|                                                         |                                                                | Prepaid expenses and other current assets                          |                                                         |            | 1,533,000  |           |            |           | (159,000   | )         
|                                                         |                                                                | Accounts payable                                                   |                                                         |            | (143,000   | )         |            |           | (2,756,000 | )         
|                                                         |                                                                | Accrued expenses and other current liabilities                     |                                                         |            | 942,000    |           |            |           | (272,000   | )         
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         |                                                                |                                                                    | Net cash provided by (used in) operating
    activities |            |            | 2,163,000 |            |           |            | (3,729,000 | )
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|CASH FLOWS FROM INVESTING
    ACTIVITIES:                |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         | Decrease in restricted cash                                    |                                                                    |                                                         |            |            |           |            | 3,530,000 |           
|                                                         | Increase in other assets                                       |                                                                    |                                                         | 125,000    |            |           |            | (37,000   | )         
|                                                         | Decrease in notes receivable                                   |                                                                    |                                                         | 306,000    |            |           |            | 80,000    |           
|                                                         | Proceeds from sale of property                                 |                                                                    |                                                         |            |            |           |            | 35,000    |           
|                                                         | Additions to property, equipment and leaseholds                |                                                                    |                                                         | (1,160,000 | )          |           |            | (610,000  | )         
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         |                                                                |                                                                    | Net cash provided by (used in) investing
    activities |            |            | (729,000  | )          |           |            | 2,998,000  |  
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|CASH FLOWS FROM FINANCING
    ACTIVITIES:                |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         | Net reduction of debt instruments                              |                                                                    |                                                         | (768,000   | )          |           |            | (418,000  | )         
|                                                         | Repurchase of common stock                                     |                                                                    |                                                         |            |            |           |            | (370,000  | )         
|                                                         | Proceeds from exercise of stock options                        |                                                                    |                                                         | 14,000     |            |           |            |           |           
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         |                                                                |                                                                    | Net cash used in financing activities                   |            |            | (754,000  | )          |           |            | (788,000   | )
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|Effect of exchange rate changes on cash                  |                                                                |                                                                    | 8,000                                                   |            |            |           | (39,000    | )        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                |                                                                    | 688,000                                                 |            |            |           | (1,558,000 | )        
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    PERIOD       |                                                                |                                                                    | 2,802,000                                               |            |            |           | 5,565,000  |          
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|CASH AND CASH EQUIVALENTS, END OF
    PERIOD             |                                                                | $                                                                  | 3,490,000                                               |            |            | $         | 4,007,000  |          
|                                                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|CASH PAID DURING THE PERIOD FOR:                         |                                                                |                                                                    |                                                         |            |            |           |            |          
|                                                         | Interest                                                       |                                                                    | $                                                       | 1,527,000  |            |           | $          | 1,286,000 |           
|                                                         | Income taxes                                                   |                                                                    | $                                                       | 349,000    |            |           | $          | 4,539,000 |           

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

September 30, 2003


(Unaudited)


Note 1  General

Business

Mercury Air Group, Inc. (the
Company), a Delaware Corporation, was organized in
1956 and provides a broad range of services to the aviation
industry through four principal operating units: Mercury Air
Centers, Inc. (Air Centers), Mercury Air Cargo, Inc.
(Air Cargo), MercFuel, Inc. (MercFuel)
and Maytag Aircraft Corporation (Maytag), a provider
of government contract services. The Air Centers operations
consist of aviation fuel sales, commercial aircraft refueling
operations (into-plane), aircraft ground support
services, aircraft hangar services, secured aircraft parking
(aircraft tie-down services) and aircraft
maintenance at certain Air Center locations, known as Fixed
Based Operations (FBOs), for commercial,
private, general aviation and United States Government aircraft
(collectively FBO services). Air Cargos
operations consist of cargo handling, the sale of cargo capacity
on other airlines (Cargo Space Logistics), and
general cargo sales agent services. MercFuels operations
consist of the sale and delivery of fuel, primarily aviation
fuel, to domestic and international commercial airlines,
corporate aviation and air freight airlines. Maytags
government contract services consist of the following services
primarily for agencies of the United States Government: aircraft
refueling and fuel storage operations, base operations support
(BOS) services, air terminal and ground handling
services and weather observation and forecasting services.

On October 28, 2003, the Company announced
that it had entered into a definitive agreement, subject to the
Companys stockholders approval, completion of due
diligence, and regulatory agencies approvals and consents,
to sell 100% of the outstanding common stock of Air Centers to
Allied Capital Corporation (Allied) for
$70 million, subject to adjustments (the FBO
Sale). In accordance with the terms of the definitive
agreement, as amended, closing of this transaction is to occur
on January 16, 2004 but the closing date can be extended,
at Allieds discretion, to April 16, 2004. The Company
expects the closing of the FBO sale to occur during its third
quarter of fiscal 2004.



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

As of September 30, 2003, the
$24.0 million Senior Subordinated 12% Note (the
Note) contained provisions that provided incentives
for the Company to prepay the principal of the Note. If the
entire principal of the Note was not prepaid by
December 31, 2003, the Note holder would have been entitled
to stock warrants equivalent to 5% of the Companys
outstanding shares of common stock then outstanding, exercisable
for nominal consideration. If the principal amount of the Note
was in excess of $12.0 million on December 31, 2003,
the Note holder would have been entitled to receive stock
warrants equivalent to an additional 5% of the number of shares
of common stock outstanding at that date, exercisable for
nominal consideration, along with an additional note with a
principal amount of $5.0 million. In addition, beginning
January 2004 and continuing through June 2004, the interest rate
was to increase by 1% per annum each month up to a maximum rate
of 18%. Since December 30, 2002, the effective date of this
amended Note, the Company expected that the Note would be
outstanding for the full term of the Note and, therefore,
accrued for the premium associated with the issuance of the
additional consideration over the remaining term of the Note
which was 36 months. However, on October 28, 2003, the
Company announced that Allied had acquired the Note from the
holder and had waived the provisions of the Note regarding the
additional stock warrants, equivalent to 10% of the
Companys outstanding common stock, that would have been
issued on December 31, 2003, as well as the provision
regarding the additional $5.0 million note. In conjunction
with the acquisition of the Note by Allied, the Company and
Allied entered into a definitive agreement for Allied to
purchase 100% of the outstanding common stock of Air Centers
from the Company, subject to the Companys
stockholders approval, completion of due diligence and
regulatory agency approvals. The purchase price for the Air
Centers is $70 million, subject to adjustment for working
capital and for certain investments made by the Company. At

5



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

the close of the FBO Sale, $8.3 million from
the sale proceeds will be deposited into an escrow account
pending the award of a new lease for the FBO located at
Atlantas Hartsfield International Airport. In accordance
with the terms of the definitive agreement, as amended, the
closing date for the FBO Sale is January 16, 2004 with Allied
having the right to extend the closing date through April 16,
2004. The Company expects the FBO Sale to close during its third
quarter of fiscal 2004.

On December 5, 2003, the Company and its
lenders under the Senior Secured Credit Facility executed the
Fifth Amendment to the Loan and Security Agreement and
Forebearance Agreement (the Forebearance Agreement).
Among other things, the Company requested the lenders and the
lenders agreed to forebear from exercising their rights and
remedies under the Senior Secured Credit Facility for the
following events of default, as defined in the Loan and Security
Agreement: (1) the Companys failure to deliver its
annual audited financial statements for the fiscal year 2003
within the prescribed time-frame allowed; (2) the formation
of a subsidiary, Mercury Air Center  Long Beach, without
the prior consent of the lenders; (3) the Companys
failure to deliver supplemental schedules to the J. H. Whitney
as required under the terms of the $24 million Senior
Secured 12% Note. The Forebearance Agreement states that the
lenders agree, for a limited time, to forebear from exercising
their rights and remedies under the Senior Secured Credit
Facility with respect to the events of default noted above. The
Company is currently in compliance with the terms and conditions
of the Forebearance Agreement.

In April 2002, the Company received a notice from
Los Angeles World Airports (LAWA) of a proposed
rental increase for one of Air Cargos warehouse facilities
at LAX (the Avion Warehouse). In response to this
notice, the Company submitted protests to the LAWA Staff and
Board of Commissioners regarding the proposed increase on the
basis that: (1) the Company had made a substantial
investment in the warehouse facility and the proposed rental
increase would greatly reduce the Companys ability to
achieve an acceptable rate of return on the Companys
investment to date; (2) if any increase is to be made, it
should be determined based on the Company being the developer of
the facility and not strictly a tenant; and (3) that the
amount of the proposed increase is not justified given the
general business environment of the air cargo handling
operations. In response to the Companys protests to the
proposed increase, in September 2002 the Company received a
revised notice from LAWA of a reduced proposal for a rental
increase for the Avion Warehouse. The LAWA Staff intend to
present their recommended rental increase to the LAWA Board of
Commissioners for approval in late January 2004. From
June 18, 2003 through September 30, 2003, the
accumulated amount of the retroactive rental increase is
$1,772,000, which will be partially offset by recoverable
retroactive sublease rental income of $742,000. The LAWA Staff
has indicated that the retroactive portion of the rental
increase would be payable by the Company in equal monthly
installments over the remaining term of the lease agreement,
which is scheduled to expire in June 2006. The proposed increase
in the monthly rent, on a go-forward basis, is $64,000, or 35%,
of the existing monthly rent. As of September 30, 2003, the
Company has accrued $1,031,000 for the retroactive rental
increase, which is net of the recoverable retroactive sublease
rental income. Of this amount, $113,000 was recorded in the
first quarter of fiscal 2004.

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 the aviation industry, 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 may 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
of Mercury Air Group, Inc. and subsidiaries (the
Company) have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America
for complete financial statements. In the opinion of management,
all adjustments consisting of normal recurring adjustments and
accruals necessary for a fair presentation have been reflected
in these financial statements. Operating results for the quarter
are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2004 due to
seasonal and other factors. In order to maintain consistency and
comparability between periods presented, certain prior period
amounts have been reclassified to conform to the current period
presentation. The accompanying financial statements should be
read in conjunction with the audited consolidated financial
statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the fiscal year ended
June 30, 2003.



| |                              
| | -----------------------------
| | New Accounting Pronouncements

On April 30, 2003, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This standard amends and clarifies the
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The
provisions of this statement are generally effective for
contracts entered into or modified after June 30, 2003. The
Company does not expect this standard to have a material impact
on the Companys consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 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 December 15, 2003, to
variable interest entities considered to be a special purpose
entity (SPE) in which an enterprise holds a variable
interest that it acquired before February 1, 2003. For
non-SPE variable interest entities acquired before
February 1, 2003, the interpretation must be adopted no
later than the first interim or annual period ending after
March 15, 2004. 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 currently evaluating the potential
impact of the adoption of FIN 46.

7



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, which
establishes standards for the classification and measurement of
certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires
classification of financial instruments within its scope as a
liability, including financial instruments issued in the form of
shares that are mandatorily redeemable, because those financial
instruments are deemed to be, in essence, obligations of the
issuer. The Company does not expect that the adoption of this
standard will have a material impact on its consolidated
financial statements.

Note 2  Stock-Based Employee
Compensation

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. The Company has elected to continue utilizing the
intrinsic value method to account for stock-based compensation
as allowed by SFAS No. 123, Accounting for
Stock-Based Compensation.

SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123, to require disclosure in both
interim and annual financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is
effective for the Companys fiscal year ended June 30,
2003 and for interim financial statements beginning
January 1, 2003.

The Company has five stock option plans. As
permitted under SFAS No. 123, the Company measures
compensation expense related to employee stock options granted
utilizing the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations under the
intrinsic value method. The following table illustrates the pro
forma effect on the net loss if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based
employee compensation.

|                                                                                                                             |  |                    |          |      |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ---- |  | - | -------- | -
|                                                                                                                             |  |                   
|                                                                                                                             |  | Three Months Ended
|                                                                                                                             |  | September 30,     
|                                                                                                                             |  |                   
|                                                                                                                             |  | 2003               |          | 2002
|                                                                                                                             |  |                    |          |     
|Net loss, as reported                                                                                                        |  | $                  | (302,000 | )    |  | $ | (589,000 | )
|Add stock-based employee compensation expense
    included in net loss, net of tax                                           |  |                    | 62,000   |      |  |   | 274,000  |  
|Less total stock based employee compensation
    determined under the fair value based method for all awards, net
    of tax |  |                    | (32,000  | )    |  |   | (198,000 | )
|                                                                                                                             |  |                    |          |      |  |   |          |  
|Pro forma net loss                                                                                                           |  | $                  | (272,000 | )    |  | $ | (513,000 | )
|                                                                                                                             |  |                    |          |      |  |   |          |  
|Basic net loss per share  as reported                                                                                       |  | $                  | (0.09    | )    |  | $ | (0.18    | )
|Basic net loss per share  pro forma                                                                                         |  | $                  | (0.08    | )    |  | $ | (0.16    | )
|Diluted net loss per share  as reported                                                                                     |  | $                  | (0.09    | )    |  | $ | (0.18    | )
|Diluted net loss per share  pro forma                                                                                       |  | $                  | (0.08    | )    |  | $ | (0.16    | )

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

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 (the SPCC Plan) did not meet
certain federal regulatory guidelines. Specifically, the
Environmental Protection Agency (EPA) alleged

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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

that Mercurys SPCC Plan 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
Company was notified of some deficiencies in its latest SPCC
Plan and requested that Mercury submit a written response to its
allegations within 30 days. On March 14, 2003, Mercury
received a NOV from the United States Environmental Protection
Agency, Region 5 (EPA Region 5) alleging
certain deficiencies in the SPCC Plan for its Fort Wayne,
Indiana facility, submitted to the EPA Region 5 in November
2002. Mercury believes that it has resolved all deficiencies
except for alleged deficiencies related to secondary containment
for refueler trucks, and for its discrete fuel loading areas.
Pursuant to an agreement detailed in a letter submitted to the
EPA Region 5 on April 16, 2003, Mercury has been
permitted to suspend modifications to its SPCC Plan regarding
the installation of secondary containment for its refueler
trucks, pending resolution of federal regulatory issues
associated with secondary containment for such trucks. The EPA
Region 5 has also extended national compliance with regulations
related to discrete loading areas until August 17, 2004. In
the opinion of management, the ultimate resolution of this
matter is not expected to have a material effect on the
Companys consolidated financial statements.

On April 16, 2003, the Plan Committee of
Shuttle America Corp filed a Adversary Proceeding in the United
States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The parties
reached a settlement agreement, which provides that the Company
will pay Shuttle America $40,000. The settlement agreement is
subject to approval of the Bankruptcy Court.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Mercury Air
Centers, Inc. and Allied Capital Corporation alleging:
(1) breach of contract and tortious Interference with
contract against Allied; (2) interference with prospective
economic advantage against Allied; and (3) unfair business
practices against Mercury and Allied. The Company believes that
the allegations are without merit and is in the process of
preparing a response. The Company has agreed to indemnify Allied
and its affiliates (including, without limitation, Air Centers
after the closing of the FBO Sale), directors, officers, agents
,employees and controlling persons from any liability,
obligation, loss or expense to which Allied may become subject
as a result of the complaint. In the opinion of management, the
ultimate resolution of this complaint is not expected to have a
material effect on the Companys consolidated financial
statements.

On December 5, 2003, the Company terminated
its Chief Operating Officer of Mercury Air Cargo. This former
employee is claiming one years salary, (approximately
$170,000), and other damages as a result of the termination. On
December 31, 2003, he filed notice of demand for mediation.

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 material effect on its consolidated
financial statements. Reference is made to the Companys
Annual Report on Form 10-K for the period ended
June 30, 2003 for additional Litigation Matters with
respect to which no material developments have occurred in the
current quarter.

Note 5  Debt

On December 30, 2002, the Company entered
into a loan and security agreement, (the Facility),
refinancing its senior secured credit facilities with Foothill
Capital Corporation (Foothill), a division of Wells
Fargo Bank, for a five-year term. 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. On
October 28, 2003, Allied acquired the Note from J. H.
Whitney Co. Mezzanine Fund and waived certain provisions of the
Note. See Note 10  Subsequent Event
for a description of the Note and the modified terms associated
with the Note.

9



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##### Table of Contents



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

The Facility provides a total of up to
$42.5 million in revolving and term loans. The term loan is
for an amount equal to $12.5 million, while the revolving
loan is for an amount not to exceed 85% of Eligible Accounts
Receivable (as defined in the loan agreement), subject to
certain limitations. The term loan is payable in
$1.0 million installments each April 1 and
October 1, beginning April 1, 2003 and in
$0.5 million installments each July 1 and
December 31, until paid in full. Amounts repaid under the
term loan increase the maximum availability under the revolving
loan. The Facility also provides for the issuance of certain
letters of credit. The terms of the Facility requires that the
Company maintain a minimum availability on the revolving line of
credit of $2.5 million. As of September 30, 2003, the
Company had $3.9 million of availability on the revolving
line of credit. The amount of the available revolving credit
line fluctuates on a daily basis dependent upon the amount of
Eligible Receivables and the amount of letters of credit
outstanding and the amount of outstanding cash borrowings
against the revolving credit facility.

The Facility may be terminated on
December 23, 2005, if the Note is not paid in full or
refinanced, on terms acceptable to Foothill, prior to
October 31, 2005. The Facility is collateralized 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.

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 the loan and security agreement,
if certain conditions are met, 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.

Note 6  Net Income (Loss) Per
Share

Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period.
Net diluted income (loss) per share is computed by dividing
net income (loss) by the weighted average number of common
shares and potential common shares except for amounts that are
antidilutive. Potential common shares include stock options and
shares resulting from the assumed conversion of subordinated
debentures, when dilutive.

|                                                                                                 |  |                    |           |                    |  |         |           |       |  |  |           |  |  |  |           | 
|------------------------------------------------------------------------------------------------ |  | ------------------ | --------- | ------------------ |  | ------- | --------- | ----- |  |  | --------- |  |  |  | --------- | 
|                                                                                                 |  |                    |           |                   
|                                                                                                 |  | Three Months Ended |           | Three Months Ended
|                                                                                                 |  | September 30, 2003 |           | September 30, 2002
|                                                                                                 |  |                    |           |                   
|                                                                                                 |  | Diluted            |           | Basic              |  | Diluted |           | Basic
|                                                                                                 |  |                    |           |                    |  |         |           |      
|Weighted average number of common shares
    outstanding during the period                       |  |                    | 3,298,418 |                    |  |         | 3,298,418 |       |  |  | 3,231,500 |  |  |  | 3,231,500 | 
|Common share equivalents resulting from the
    assumed exercise of stock options                |  |                    |           |                    |  |         |           |       |  |  |           |  |  |  |           | 
|                                                                                                 |  |                    |           |                    |  |         |           |       |  |  |           |  |  |  |           | 
|Weighted average number of common and common
    equivalent shares outstanding during the period |  |                    | 3,298,418 |                    |  |         | 3,298,418 |       |  |  | 3,231,500 |  |  |  | 3,231,500 | 
|                                                                                                 |  |                    |           |                    |  |         |           |       |  |  |           |  |  |  |           | 

Note 7  Segment Reporting

The Company discloses segment information in
accordance with SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information, which
requires companies to report selected segment information on a
quarterly basis and to report certain entity-wide disclosures
about products and services,

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MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

major customers and material countries in which
the entity holds assets and reports revenues. The operating
segments reported below are the segments of the Company for
which operating results are evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
Intersegment sales are not significant.

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

|                                 |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|-------------------------------- |  | ---------------------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                 |  |                        |        |            |  |            |        | Government |  | Corporate   |        |      
|                                 |  |                        |        | Fixed Base |  | Cargo      |        | Contract   |  | or          |        |      
|                                 |  | Fuel Sales             |        | Operations |  | Operations |        | Services   |  | Unallocated |        | Total
|                                 |  |                        |        |            |  |            |        |            |  |             |        |      
|                                 |  |                       
|                                 |  | (Dollars In Thousands)
|Quarter Ended September 30, 2003 |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                         |  | $                      | 64,990 |            |  | $          | 22,533 |            |  | $           | 8,894  |       |  | $ | 5,826  |  |  | $ | (1,230 | ) |  | $ | 101,013 | 
|Gross margin                     |  |                        | 1,426  |            |  |            | 3,204  |            |  |             | 773    |       |  |   | 1,312  |  |  |   |        |   |  |   | 6,715   | 
|Depreciation and amortization    |  |                        | 115    |            |  |            | 1,380  |            |  |             | 458    |       |  |   | 81     |  |  |   | 137    |   |  |   | 2,171   | 
|Capital expenditures             |  |                        | 637    |            |  |            | 485    |            |  |             | 12     |       |  |   | 17     |  |  |   | 9      |   |  |   | 1,160   | 
|Segment assets                   |  |                        | 28,104 |            |  |            | 58,292 |            |  |             | 16,864 |       |  |   | 11,068 |  |  |   | 18,369 |   |  |   | 132,697 | 
|Quarter Ended September 30, 2002 |  |                        |        |            |  |            |        |            |  |             |        |       |  |   |        |  |  |   |        |   |  |   |         | 
|Revenues                         |  | $                      | 70,573 |            |  | $          | 23,826 |            |  | $           | 7,290  |       |  | $ | 6,206  |  |  |   |        |   |  | $ | 107,895 | 
|Gross margin                     |  |                        | 1,620  |            |  |            | 2,973  |            |  |             | 404    |       |  |   | 953    |  |  |   |        |   |  |   | 5,950   | 
|Depreciation and amortization    |  |                        | 54     |            |  |            | 1,253  |            |  |             | 546    |       |  |   | 91     |  |  |   | 107    |   |  |   | 2,051   | 
|Capital expenditures             |  |                        |        |            |  |            | 524    |            |  |             | 65     |       |  |   |        |  |  |   | 21     |   |  |   | 610     | 
|Segment assets                   |  |                        | 30,957 |            |  |            | 58,797 |            |  |             | 15,262 |       |  |   | 12,059 |  |  |   | 15,311 |   |  |   | 132,386 | 

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
$326,000 and $293,000 for the quarters ended September 30,
2003 and 2002, respectively; total bad debt expense was $383,000
and $352,000 in the quarters ended September 2003 and 2002,
respectively.

Note 8  Comprehensive
Income

Comprehensive loss is summarized as follows:

|                                        |  |                    |          |      |  |   |          |  
|--------------------------------------- |  | ------------------ | -------- | ---- |  | - | -------- | -
|                                        |  |                   
|                                        |  | Three Months Ended
|                                        |  | September 30,     
|                                        |  |                   
|                                        |  | 2003               |          | 2002
|                                        |  |                    |          |     
|Net loss                                |  | $                  | (302,000 | )    |  | $ | (589,000 | )
|Foreign currency translation adjustment |  |                    | 8,000    |      |  |   | (39,000  | )
|                                        |  |                    |          |      |  |   |          |  
|Comprehensive loss                      |  | $                  | (294,000 | )    |  | $ | (628,000 | )
|                                        |  |                    |          |      |  |   |          |  

Note 9  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 28.4% of the Companys outstanding common
stock and 24% of the combined common and preferred stock.

11



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MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

In January 2002, the Company sold the land and
the office building which houses its corporate headquarters to
CFK Realty Partners, LLC (CFK Realty) for
$4,200,000, consisting of $2,800,000 in cash and a note
receivable of $1,400,000. The note accrues interest at 5% and
contains provisions whereby CFK Realty can elect to extend the
maturity date in one year increments through December 31,
2004. The note had an original maturity date of
December 31, 2002. In early December 2003, the Company
received notification from CFK Realty that it was exercising its
right to extend the maturity date of the note for an additional
one year period. Concurrently with the sale, the Company also
entered into a ten-year lease of the property for a monthly
rental amount of approximately $37,000. CFK Realty financed the
purchase of the building through a $3.2 million loan. CFK
Realty is included in the Companys consolidated financial
statements included herein.

The Company and its Chairman (collectively, the
Members) each own an equity interest in MercMed LLC
(MercMed) of 64.94% and 35.06%, respectively.
Accordingly, MercMed has been included in the Companys
consolidated financial statements and the liability to the
minority interest has also been reflected as of
September 30, 2003. Minority Interest on the Companys
consolidated balance sheet represents the minority members
equity in MercMed. MercMed was formed for the purpose of owning
and operating an aircraft for the Members. In June 2003, the
Members amended the MercMed Operating Agreement to amend each
Members ownership interest from 50% for each Member to the
ownership percentages previously noted. On March 27, 2003,
MercMed obtained new financing for the aircraft which is a
15-year loan with the interest rate being fixed for the initial
36-month period. At the end of the initial 36-month period, the
interest rate will be reviewed and fixed at the then Federal
Home Loan Banks regular three-year interest rate plus 275
basis points. Each of the Members are guarantors of this note.
Since the inception of the new loan and through
September 30, 2003, MercMed is current on the payments due.
The outstanding principal amount of the loan as of
September 30, 2003 was $691,000.

The Company uses the services of the legal firm
McBreen and Kopko (the Firm) for various general
corporate legal matters. Mr. Frederick H. Kopko, Jr., a
partner of the Firm, is a member of the Companys Board of
Directors and is a partner with CFK Partners, LLC. For the three
month periods ended September 30, 2003 and 2002, the
Company paid the Firm $142,000 and $134,000, respectively, for
legal services rendered.

Note 10  Subsequent
Events

On October 28, 2003, the Company announced
that Allied had acquired the Companys $24.0 million
Senior Subordinated 12% Note from J. H. Whitney Co. Mezzanine
Fund (the Whitney Note) and that the Company and
Allied had entered into a definitive agreement, subject to
stockholders approval, completion of due diligence and
regulatory agencies approvals and consents, for Allied to
acquire 100% of the outstanding stock of Mercury Air Centers,
Inc. for $70 million. The actual cash proceeds to be
received by the Company is subject to the establishment of an
escrow account of $8.3 million associated with the
month-to-month terms of the Air Centers FBO located at the
Atlanta Hartsfield International Airport, reimbursement for
certain FBO capital investments made by the Company, minimum Air
Centers working capital at closing and other customary terms and
conditions. In accordance with the terms of the definitive
agreement, as amended, the FBO Sale is to close on
January 16, 2004 but the closing date can be extended, at
Allieds discretion, to April 16, 2004. The Company
expects this transaction to close during its third quarter of
fiscal 2004.

The Whitney Note, as amended, included provisions
whereby the Company, if any amount of the principal on the
Whitney Note remained outstanding as of December 31, 2003,
would issue warrants to the note holder to purchase 5% of the
Companys outstanding common stock, exercisable for nominal
consideration, and, if the amount of principal on the Whitney
Note was greater than $12.0 million as of December 31,
2003, would issue warrants to the note holder to purchase an
additional 5% of the Companys outstanding common stock,
exercisable for nominal consideration, along with an additional
note in the original principal amount of $5.0 million. In
addition, the Whitney Note, as amended, also provided that
beginning January

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MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  Continued

2004 and continuing through June 2004, the
interest rate will increase by 1% per annum each month up to a
maximum of 18% per annum. Allied, in the new promissory note
issued in replacement of the Whitney Note (the Allied
Note), has waived the penalty provisions that were
included in the Whitney Note, however, beginning January 2004
and continuing through June 2004, the interest rate will
increase by 1% per annum each month up to a maximum of 18% per
annum.

On December 12, 2003, the Company entered
into a settlement agreement (the Hambro Settlement)
relating to litigation with J O Hambro Capital Management and
certain of its affiliates and private clients (J O
Hambro) whereby the Company issued three promissory notes
for an aggregate principle amount of $3,586,000 (the
Hambro Notes) in exchange for the following:
(1) the release of certain claims by J O Hambro;
(2) the Companys agreement to dismiss litigation
against J O Hambro; (3) the Companys
agreement not to institute certain litigation against
J O Hambro and certain other parties;
(4) reimbursement of certain costs associated with the
pending litigation and the defense of and preparation for
anticipated litigation between the parties; and (5) the
purchase of 343,600 shares of the Companys common
stock in exchange for the Hambro Notes. The Hambro Notes:
(1) are subordinated to the Senior Secured Credit Facility
and to the Senior Subordinated Note; (2) are due on the
earlier of (a) March 31, 2005, provided that if the
Senior Secured Credit Facility matures on December 31, 2007
then such date shall be March 31, 2008 and (b) the
ninetieth day following the payment in full of the Senior
Secured Credit Facility and the termination of commitments for
the Senior Secured Lender to provide financing under the Senior
Secured Credit Facility; and (3) bear and accrue interest
at the rate of 12% per annum commencing on December 31,
2003 but will increase to 16% per annum for any amount of unpaid
principal after June 30, 2004. During the Companys
second quarter of fiscal 2004, the Company will recognize
expense of $1.8 million, which represents the consideration
paid to J O Hambro in excess of the market value of the shares
at the time of the settlement.

At the close of the FBO Sale, the Company
estimates gross sales proceeds of $73.1 million. The
Company intends to use these proceeds to: 1) prepay the
outstanding principal amount on the Senior Secured Term Loan of
$10 million; 2) repay all outstanding cash advances on
the Revolving Line of Credit; 3) pay all accrued interest,
fees and expenses associated with the Senior Secured Credit
Facility; 4) provide cash collateral for the outstanding
Letters of Credit of approximately $16.0 million;
5) prepay the outstanding principal amount on the Allied
Note; 6) pay all accrued interest, fees and expenses
associated with the Allied Note; 7) establish an escrow
account for the FBO located at the Hartsfield Airport in the
amount of $8.3 million; 8) repay the outstanding
principal amount due on the Hambro Note of $3.6 million;
9) repay all accrued interest on the Hambro Note; and
10) pay all commissions, fees and expenses associated with
the FBO Sale. After settlement of the all of the obligations
noted above, the Company estimates that the FBO Sale will result
in surplus cash proceeds of $4.0 million, of which an
estimated $1.5 million will be required to settle the
Companys current income tax obligation associated with the
FBO Sale.

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

Results of Operations Comparison of the Three Months ended
September 30, 2003 and September 30, 2002

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

|                             |  |                                  |         |            |  |        |       |            |  |   |         |  |  |  |       |  
|---------------------------- |  | -------------------------------- | ------- | ---------- |  | ------ | ----- | ---------- |  | - | ------- |  |  |  | ----- | -
|                             |  |                                 
|                             |  | Three Months Ended September 30,
|                             |  |                                 
|                             |  |                                  |         |           
|                             |  | 2003                             |         | 2002      
|                             |  |                                  |         |           
|                             |  |                                  |         | % of Total |  |        |       | % of Total
|                             |  | Amount                           |         | Revenues   |  | Amount |       | Revenues  
|                             |  |                                  |         |            |  |        |       |           
|                             |  |                                 
|                             |  | ($ in thousands)                
|Revenues:                    |  |                                  |         |            |  |        |       |            |  |   |         |  |  |  |       |  
|Fuel Sales                   |  | $                                | 64,990  |            |  |        | 64.3  | %          |  | $ | 70,573  |  |  |  | 65.4  | %
|FBOs                         |  |                                  | 22,533  |            |  |        | 22.3  |            |  |   | 23,826  |  |  |  | 22.1  |  
|Cargo Operations             |  |                                  | 8,894   |            |  |        | 8.8   |            |  |   | 7,290   |  |  |  | 6.8   |  
|Government Contract Services |  |                                  | 5,826   |            |  |        | 5.8   |            |  |   | 6,206   |  |  |  | 5.7   |  
|Intercompany Eliminations    |  |                                  | (1,230  | )          |  |        | (1.2  | )          |  |   | 0       |  |  |  | 0     |  
|                             |  |                                  |         |            |  |        |       |            |  |   |         |  |  |  |       |  
|Total Revenue                |  | $                                | 101,013 |            |  |        | 100.0 | %          |  | $ | 107,895 |  |  |  | 100.0 | %
|                             |  |                                  |         |            |  |        |       |            |  |   |         |  |  |  |       |  

|                             |  |        |       |           |  |        |      |           |  |   |       |  |  |  |      |  
|---------------------------- |  | ------ | ----- | --------- |  | ------ | ---- | --------- |  | - | ----- |  |  |  | ---- | -
|                             |  |        |       | % of Unit |  |        |      | % of Unit
|                             |  | Amount |       | Revenues  |  | Amount |      | Revenues 
|                             |  |        |       |           |  |        |      |          
|Gross Margin(1):             |  |        |       |           |  |        |      |           |  |   |       |  |  |  |      |  
|Fuel Sales                   |  | $      | 1,426 |           |  |        | 2.2  | %         |  | $ | 1,620 |  |  |  | 2.3  | %
|FBOs                         |  |        | 3,204 |           |  |        | 14.2 |           |  |   | 2,973 |  |  |  | 12.5 |  
|Cargo Operations             |  |        | 773   |           |  |        | 8.7  |           |  |   | 404   |  |  |  | 5.6  |  
|Government Contract Services |  |        | 1,312 |           |  |        | 22.5 |           |  |   | 953   |  |  |  | 15.4 |  
|                             |  |        |       |           |  |        |      |           |  |   |       |  |  |  |      |  
|Total Gross Margin           |  | $      | 6,715 |           |  |        | 6.7  | %         |  | $ | 5,950 |  |  |  | 5.5  | %
|                             |  |        |       |           |  |        |      |           |  |   |       |  |  |  |      |  

|                                      |  |        |       |            |  |        |      |            |  |   |       |   |  |  |      |   
|------------------------------------- |  | ------ | ----- | ---------- |  | ------ | ---- | ---------- |  | - | ----- | - |  |  | ---- | --
|                                      |  |        |       | % of Total |  |        |      | % of Total
|                                      |  | Amount |       | Revenues   |  | Amount |      | Revenues  
|                                      |  |        |       |            |  |        |      |           
|Selling, general and administrative   |  | $      | 2,275 |            |  |        | 2.3  | %          |  | $ | 2,615 |   |  |  | 2.4  | % 
|Provision for bad debts               |  |        | 383   |            |  |        | 0.4  |            |  |   | 352   |   |  |  | 0.3  |   
|Depreciation and amortization         |  |        | 2,171 |            |  |        | 2.1  |            |  |   | 2,051 |   |  |  | 1.9  |   
|Interest expense and other            |  |        | 2,381 |            |  |        | 2.4  |            |  |   | 1,332 |   |  |  | 1.2  |   
|Write off of deferred financing costs |  |        | 0     |            |  |        | 0    |            |  |   | 500   |   |  |  | 0.5  |   
|                                      |  |        |       |            |  |        |      |            |  |   |       |   |  |  |      |   
|Loss before tax                       |  |        | (495  | )          |  |        | (0.5 | )          |  |   | (900  | ) |  |  | (0.8 | ) 
|Income tax benefit                    |  |        | (193  | )          |  |        | (0.2 | )          |  |   | (311  | ) |  |  | (0.3 | ) 
|                                      |  |        |       |            |  |        |      |            |  |   |       |   |  |  |      |   
|Net loss                              |  | $      | (302  | )          |  |        | (0.3 | )%         |  | $ | (589  | ) |  |  | (0.5 | )%
|                                      |  |        |       |            |  |        |      |            |  |   |       |   |  |  |      |   



---



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross margin as used here and throughout
    Managements Discussion includes certain selling, general
    and administrative costs which are charged directly to the
    operating units, but excludes depreciation and amortization
    expenses and selling, general and administrative expense.

Three Months Ended September 30, 2003
Compared to September 30, 2002

Revenue for the Company in the first quarter of
fiscal 2004 was $101,013 thousand, which decreased by 6.4%
from revenue of $107,895 thousand reported for the first
quarter of fiscal 2003. The decrease in revenue is due to lower
MercFuel revenue of $5,583 thousand. Gross margin increased
by 12.9% to $6,715 thousand in the first quarter of fiscal
2004 from $5,950 thousand reported in the first quarter of
fiscal 2003. The increase in

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gross margin is due to improved performances at
the Companys Air Centers, Air Cargo and Maytag Government
Contract Services Operations segments.


MercFuel, the Companys fuel sales business,
generated revenue of $64,990 thousand in the current
period, a decrease of $5,583 thousand or 7.9% from last
years revenue of $70,573 thousand. The decrease in
revenue was primarily due to lower sales volume partially offset
by higher average fuel sales prices. Fuel sales volume was
64.3 million gallons in the first quarter of fiscal 2004, a
decrease of 15.8 million gallons from the same period of
fiscal 2003 resulting in a reduction in sales revenue of
$13.9 million. The decline in sales volume is due to
National Airlines, Inc. (National), a customer of
MercFuel since May 1999, ceasing operations on November 6,
2002. Sales volume to National in the first quarter of fiscal
2003 was 20.9 million gallons, resulting in revenue of
$17.5 million. Excluding the sales volume to National from
the sales volume in the first quarter of fiscal 2003, first
quarter 2004 sales volume increased 5.2 million gallons, or
8.8% from last year. The average sales price in the first
quarter of fiscal 2004 was $1.01 per gallon, an increase of
$0.129 per gallon from the same period of last year resulting in
revenue increasing due to higher average sales prices of
$8.3 million. The higher average sales price is due to
higher worldwide petroleum prices. Revenues from the fuel sales
business represented 64.3% of the Companys total revenue
in the current period compared to 65.4% of revenue in the
comparable prior year quarter. Gross margin from fuel sales was
$1,426 thousand in the current period compared with
$1,620 thousand in the same period last year, of which
$0.2 million was generated from sales to National. The
decline in gross margin was primarily due to National ceasing
operations. The average gross margin per gallon sold in the
first quarter of fiscal year 2004 was $0.0396 per gallon as
compared to $0.0347 for the same period last year.

The Companys Air Centers business segment
had revenue of $22,533 thousand in the first quarter of
fiscal year 2004, a decrease of $1,293 thousand or 5.4%
from last years first quarter revenue of
$23,826 thousand. The revenue decrease was mainly due to
lower revenue of $1.0 million in maintenance activities in
the Air Center operations. The Air Centers aviation fuel
sales volume in the first quarter of fiscal 2004 was
7.8 million gallons with an average sales price of $1.91
per gallon as compared to last years first quarter sales
volume of 8.8 million gallons with an average sales price
of $1.70 per gallon. The higher average sales price was mainly
due to higher worldwide petroleum prices. Gross margin increased
by $231 thousand or 7.8% in the current period to
$3,204 thousand from $2,973 thousand last year due to
the Companys efforts to reduce operating expenses.

The Companys Air Cargo operations had
revenue of $8,894 thousand in the first quarter of fiscal
2004, an increase of $1,604 thousand or 22% from the
revenue of $7,290 thousand in the first quarter of fiscal
2003. The increase in revenue is mainly due to improvements in
cargo handling of $0.5 million, cargo management of
$0.2 million and cargo marketing services of
$0.9 million. Gross margin from Air Cargo operation in the
current period increased by $369 thousand, or 91.3%, to
$773 thousand from $404 thousand in the year ago
period due to higher volume for cargo management and Mercury
World Cargo operations resulting in higher gross margin of
$0.2 million and of $0.2 million, respectively.

The Companys Government Contract Services
segment had revenue of $5,826 thousand in the first quarter
of fiscal 2004, a decrease of $380 thousand or 6.1% from
revenue of $6,206 thousand in the first quarter of fiscal
2003. The revenue decrease is primarily due to the decreased
revenue from the Weather Data Services contracts in the amount
of $0.3 million and the loss of one refueling contract,
which generated revenue of $0.3 million last year. Gross
margin in the current period increased by $359 thousand or
37.7% to $1,312 thousand from $953 thousand last year
due to higher margin on the Kuwait Air Terminal and the Patrick
Base Operation contracts, which had a reserve for legal
settlements of $0.3 million in the first quarter of fiscal
2003.

Selling, general and administrative expenses in
the current quarter decreased by $340 thousand, or 13.0%,
to $2,275 thousand from $2,615 thousand in last
years quarter primarily due to $0.3 million
associated with the extension of certain stock options and
$0.3 million associated with a reserve for legal
settlements included in the first quarter of fiscal 2003.

Provision for bad debts was $383 thousand in
the current period, essentially unchanged from the same period
last year.

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Depreciation and amortization expense was
$2,171 thousand in the current period compared to
$2,051 thousand a year ago.

Interest expense and other was
$2,381 thousand in the first quarter of fiscal 2004, an
increase of $1,049 thousand from the same period last year.
The increase was primarily due to the accrual in the first
quarter of fiscal 2004 of $0.9 million for the premium
relating to the senior subordinated note which would have been
payable in the event the note was not prepaid prior to
December 31, 2003. As noted in
Note 10  Subsequent Events, on
October 28, 2003, the Company announced that Allied had
acquired the senior subordinated note from J.H. Whitney and
waived many of the premiums that would have been due in the
event that the note was not prepaid by December 31, 2003.

The Company wrote off capitalized financing costs
in the first quarter of fiscal 2003 associated with the
Companys debt restructuring in the amount of
$500 thousand.

The effective income tax rate in the first
quarter of fiscal year 2004 was 39.0% compared to 34.5% in the
same period last year. The lower effective income tax rate in
the prior period is due to certain non-deductible expenses and a
lower effective state income tax benefit rate.

Liquidity and Capital Resources

As of September 30, 2003, the Companys
cash and cash equivalents were $3.5 million, an increase of
$0.7 million as compared to a decrease of $1.6 million
during last years first quarter.

Cash provided by operating activities for the
three month period ended September 30, 2003 was
$2.2 million as compared to cash used for operating
activities of $3.7 million in the first quarter of fiscal
2003. The change in operating assets and liabilities resulted in
an increase of $0.1 as compared to a decrease of
$6.2 million in the first quarter of fiscal 2003 which
reflects a payment of $4.5 million for income taxes
primarily due to the sale of the Bedford FBO late in fiscal 2002.

During the first three months of fiscal 2004, the
Company used $0.7 million in investing activities primarily
due to additions to property, equipment and leaseholds of
$1.2 million, offset by a $0.4 million reduction in
notes receivable and other assets. This compared to cash
provided from investing activities of $3.0 million during
the first quarter of fiscal 2003 resulting from the reduction in
restricted cash of $3.5 million established to pay for the
estimated income tax obligation from the sale of the Bedford FBO
partially offset by capital expenditures of $0.6 million.
The Companys financing activities resulted in a net cash
outlay of $0.8 million during the first quarter primarily
associated with the scheduled repayment of debt, essentially
unchanged from last year.

On December 30, 2002, the Company entered
into a loan and security agreement with Foothill Capital
Corporation (Foothill), now known as Wells Fargo
Foothill, a division of Wells Fargo Bank (the
Facility), refinancing its senior collateralized
credit facilities 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 amending the terms of the
subordinated note (the Whitney Note), which will
mature on December 31, 2005. The initial funding from the
facility and the amendments to the subordinated note were
completed on December 31, 2002.

The Companys senior secured credit facility
(Facility) consists of up to $42.5 million in
revolving and term loans. The term loan is currently for an
amount equal to $11.0 million, while the revolving loan is
for an amount not to exceed 85% of Eligible Accounts Receivable
(as defined in the loan agreement), subject to certain
limitations. The term loan is payable in $1.0 million
installments each April 1 and October 1, beginning
April 1, 2003 and in $0.5 million installments each
July 1 and December 31, until paid in full. Amounts
repaid under the term loan increase the maximum availability
under the revolving loan. The Facility also provides for the
issuance of certain letters of credit. The terms of the Facility
require that the Company maintain a minimum availability on the
revolving line of credit of $2.5 million. As of
September 30, 2003, the Company had $3.9 million of
availability on the revolving line of credit. The amount of
available revolving credit line fluctuates on a daily basis
dependent upon the amount of Eligible Receivables, the amount of
letters of credit outstanding and the amount of outstanding cash
borrowings against the revolving credit facility.

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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 collateralized 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 amended Whitney Note is in the form of a
$24.0 million Senior Subordinated 12% Note (the
Note) with detachable warrants to purchase
251,563 shares of the Companys common stock
exercisable through September 9, 2006 at $6.10 per share as
adjusted for the one-for-two stock split in July 2003. The
warrant exercise price was reduced from $11.0 per share. The
Note is collateralized 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 issuable 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 million must
also be issued if the outstanding principal amount of the Note
is greater than $12 million after December 31, 2003.
However, on October 28, 2003 the Company announced that
Allied had acquired the Note from Whitney and waived the
provisions for the additional warrants equivalent to 10% of the
Companys outstanding common stock and the additional
$5 million note. Beginning January 2004 and continuing
through June 2004, the interest rate will increase by 1% per
annum each month up to a maximum rate of 18%. The amended note
contains similar covenants as 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.

On October 28, 2003, the Company also
announced the FBO Sale, for which closing is, among other
things, contingent on: 1) stockholder approval; 2) the
completion of due diligence; and 3) regulatory
agencies approvals and consents. The proceeds from the FBO
Sale are subject to the establishment of an escrow account in
the amount of $8.3 million to be distributed at the earlier
of the award of a long term lease to Allied for the FBO at the
Hartsfield Airport or in five equal annual installment payments
starting at the first anniversary date of the close of the FBO
Sale if the Air Centers lease for the Hartsfield FBO is
not terminated earlier, reimbursement for certain FBO capital
expenditures made by the Company, minimum working capital
amounts at closing and other customary terms and conditions. The
Company has received consent for the FBO Sale from its Senior
Lenders. In accordance with the terms of the definitive
agreement, as amended, the FBO Sale is to close on
January 16, 2004 but the closing date can be extended, at
Allieds discretion, to April 16, 2004. The Company
expects the FBO Sale to close in the Companys third
quarter of fiscal 2004.

On December 5, 2003, the Company and its
lenders under the Senior Secured Credit Facility executed the
Fifth Amendment to the Loan and Security Agreement and
Forebearance Agreement (the Forebearance Agreement).
Among other things, the Company requested the lenders and the
lenders agreed to forebear from exercising their rights and
remedies under the Senior Secured Credit Facility for the
following events of default, as defined in the Loan and Security
Agreement: (1) the Companys failure to deliver its
annual audited financial statements for the fiscal year 2003
within the prescribed time-frame allowed; (2) the formation
of a subsidiary, Mercury Air Center  Long Beach,
without the prior consent of the lenders; (3) the
Companys failure to deliver supplemental schedules to the
J. H. Whitney as required under the terms of the
$24 million Senior Secured 12% Note. The Forebearance
Agreement states that the lenders agree, for a limited time, to
forebear from exercising their rights and remedies under the
Senior Secured Credit Facility with respect to the events of
default noted above. The Company is currently in compliance with
the terms and conditions of the Forebearance Agreement.

On December 12, 2003, the Company entered
into a settlement agreement (the Hambro Settlement)
relating to litigation with J O Hambro Capital Management and
certain of its affiliates and private clients (J O
Hambro) whereby the Company issued three promissory notes
for an aggregate principle amount of $3,586,000 (the
Hambro Notes) in exchange for the following, among
other things: (1) The release of certain claims by J
O Hambro; (2) the Companys agreement to dismiss
litigation against J O Hambro;

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(3) the Companys agreement not to
institute certain litigation against J O Hambro and certain
other parties; (4) reimbursement of certain costs
associated with the pending litigation and the defense
preparation for anticipated litigation between the parties; and
(5) the purchase of 343,600 shares of the Companys
common stock in exchange for the Hambro Notes. The Hambro Notes:
1) are subordinated to the Senior Secured Credit Facility
and to the Senior Subordinated Note; 2) are due on the
earlier of (a) March 31, 2006, provided that if the
Senior Secured Credit Facility Matures on December 31, 2007
then such date shall be March 31, 2008 and (b) the
ninetieth day following payment in full of the Senior Secured
Credit Facility and the termination of commitments for the
Senior Secured Lender to provide financing under the Senior
Secured Credit Facility; and 3) bear and accrue interest at
the rate of 12% per annum commencing on December 31, 2003
but will increase to 16% per annum for any amount of unpaid
principal after June 30, 2004. During the second quarter of
fiscal 2004, the Company will recognize as expense
$1.8 million, which represents the consideration paid to
J.O. Hambro in excess of the market value of such shares at that
time.


At the close of the FBO Sale, the Company
estimates gross sales proceeds of $73.1 million. The
Company intends to use these proceeds to: 1) prepay the
outstanding principal amount on the Senior Secured Term Loan of
$10 million; 2) repay all outstanding cash advances on
the Revolving Line of Credit; 3) pay all accrued interest,
fees and expenses associated with the Senior Secured Credit
Facility; 4) provide cash collateral for the outstanding
Letters of Credit of approximately $16.0 million;
5) prepay the outstanding principal amount on the Allied
Note; 6) pay all accrued interest, fees and expenses
associated with the Allied Note; 7) establish an escrow
account for the FBO at the Hartsfield Airport in the amount of
$8.3 million; 8) repay the outstanding principal
amount due on the J. O. Hambro Note of $3.6 million;
9) repay all accrued interest on the Hambro Notes; and
10) pay all commissions, fees and expenses associated with
the sale transaction. After settlement of the all of the
obligations noted above, the Company estimates that the
transaction will result in surplus cash proceeds of
approximately $4.0 million, of which an estimated
$1.5 million will be required to settle the Companys
current income tax obligation associated with the FBO Sale
although the exact amount of the surplus cash proceeds will be
dependent upon many factors including, but not limited to, the
date of closing.

The Company is currently evaluating new credit
facilities to support the Companys expansion of its
remaining three business lines and to support the Companys
Letters of Credit requirements thereby releasing the cash
collateral of approximately $16 million to be used for
working capital requirements and general corporate purposes.

Critical Accounting Policies

Managements beliefs regarding critical
accounting policies have not changed significantly from those
discussed in Item 7 of the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2003.






|        |                                                              
|------- | -------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosure
    About Market Risk

There has been no material change during the
quarter ended September 30, 2003 from the disclosures
regarding market risk presented in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30,
2003.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Based on evaluations as of September 30,
2003, 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-15(e) and 15d-15(e) 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.

18



---



##### Table of Contents



Changes in Internal Controls

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

Forward-Looking Statements

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




PART II  OTHER
INFORMATION






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

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 (the SPCC Plan) did not meet
certain federal regulatory guidelines. Specifically, the
Environmental Protection Agency (EPA) alleged that
Mercurys SPCC Plan 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 Company was
notified of some deficiencies in its latest SPCC Plan and
requested that Mercury submit a written response to its
allegations within 30 days. On March 14, 2003, Mercury
received a NOV from the United States Environmental Protection
Agency, Region 5 (EPA Region 5) alleging
certain deficiencies in the SPCC for its Fort Wayne, Indiana
facility, submitted to the EPA Region 5 in November 2002.
Mercury believes that it has resolved all deficiencies except
for alleged deficiencies related to secondary containment for
refueler trucks for its discrete fuel loading areas. Pursuant to
an agreement detailed in a letter submitted to the EPA
Region 5 on April 16, 2003, Mercury has been permitted
to suspend modifications to its SPCC Plan regarding the
installation of secondary containment for its refueler trucks,
pending resolution of federal regulatory issues associated with
secondary containment for such trucks. The EPA Region 5 has
also extended national compliance with regulations related to
discrete loading areas until August 17, 2004. In the
opinion of management, the ultimate resolution of this matter is
not expected to have a material effect on the Companys
consolidated financial statements.

On April 16, 2003, the Plan Committee of
Shuttle America Corp filed a Adversary Proceeding in the United
States Bankruptcy Court, District of Connecticut alleging
preferential transfers in the amount of $995,000. The parties
reached a settlement agreement, which provides that the Company
will pay Shuttle America $40,000. The settlement agreement is
subject to approval of the Bankruptcy Court.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Mercury Air
Centers, Inc. and Allied Capital Corporation alleging:
(1) breach of contract and tortious Interference with
contract against Allied; (2) interference with prospective
economic advantage against Allied; and (3) unfair business
practices against Mercury and Allied. The Company believes that
the allegations are without merit and is in the process of
preparing a response. The Company has agreed to indemnify Allied
and its affiliates (including, without limitation, Air Centers
after the closing of the FBO Sale), directors, officers, agents,
employees and controlling persons from any liability,
obligation, loss or expense to which Allied may become

19



---



##### Table of Contents



subject as a result of the complaint. In the
opinion of management, the ultimate resolution of this complaint
is not expected to have a material effect on the Companys
consolidated financial statements.


On December 5, 2003, the Company terminated
its Chief Operating Officer of Mercury Air Cargo. This former
employee is claiming one years salary, (approximately
$170,000), and other damages as a result of the termination. On
December 31, 2003, he filed notice of demand for mediation.

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 material effect on its consolidated
financial statements. Reference is made to the Companys
Annual Report on Form 10-K for the period ended
June 30, 2003 for additional litigation matter with respect
to which no material developments have occurred in the current
quarter.






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

None






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

None






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

None






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

None






|        |                              
|------- | -----------------------------
|Item 6. | Exhibits and
    Exhibit List

(a) Exhibits and Reports on
Form 8-K:

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                          
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 2.1 |             |  | Agreement and Plan of Merger adopted
    January 9, 2001.(17)                                                                                                                                                                                                                                                                            
|        | 2.2 |             |  | Certificate of Merger.(17)                                                                                                                                                                                                                                                                                                               
|        | 2.3 |             |  | Stock Purchase Agreement Dated as of
    October 28, 2003. By and Among Allied Capital Corporation,
    Mercury Air Centers, Inc. and Mercury Air Group, Inc.(28)                                                                                                                                                                        
|        | 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.(27)                                                                                                                                                                                                                                               
|        | 4.1 |             |  | Loan Agreement between California Economic
    Development Financing Authority and Mercury Air Group, Inc.
    relating to $19,000,000 California Economic Development
    Financing Authority Variable Rate Demand Airport Facilities
    Revenue Bonds, Series 1998 (Mercury Air Group, Inc.
    Project) dated as of April 1, 1998.(2)
|        | 4.2 |             |  | Securities Purchase Agreement dated
    September 10, 1999 by and among Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P.(12)                                                                                                                                                                                            
|        | 4.3 |             |  | Amendment No. 1 dated as of
    September 30, 2000 by and between J.H. Whitney Mezzanine,
    L.P. and Mercury Air Group, Inc. to the Securities Agreement.(16)                                                                                                                                                                          
|        | 4.4 |             |  | Waiver and Consent Agreement dated as of
    December 29, 2000 among Mercury Air Group, Inc. and J.H.
    Whitney Mezzanine Fund, L.P.(17)                                                                                                                                                                                               
|        | 4.5 |             |  | Waiver and Consent Agreement dated as of
    July 2, 2001 among Mercury Air Group, Inc. and
    J.H. Whitney Mezzanine Fund, L.P.(18)                                                                                                                                                                                                    

20



---



##### Table of Contents



|        |      |             |  |                                                                                                                                                                                                                                     
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|No.     |      | Description
|        |      |            
|        | 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)                                        
|        | 4.17 |             |  | First Amendment to Loan and Security Agreement by
    and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated March 12,
    2003.(30)                                         
|        | 4.18 |             |  | Second Amendment to Loan and Security Agreement
    by and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated March 31,
    2003.(30)                                        
|        | 4.19 |             |  | Third Amendment to Loan and Security Agreement by
    and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated July 16,
    2003.(30)                                          
|        | 4.20 |             |  | Fourth Amendment to Loan and Security Agreement
    by and among Foothill Capital Corporation and Mercury Air Group,
    Inc. and certain of its subsidiaries, dated August 1,
    2003.(30)                                        
|        | 4.21 |             |  | Amendment No. 4 to Securities Purchase
    Agreement by and between Mercury Air Group, Inc. and Allied
    Capital Corporation, as Assignee of J.H. Whitney Mezzanine Fund,
    L.P. dated as of October 28, 2003(28)               
|        | 4.22 |             |  | Assignment of Note dated as of October 28,
    2003 between Allied Capital Corporation and J.H. Whitney
    Mezzanine Fund, L.P.(28)                                                                                                
|        | 4.23 |             |  | Second Amended and Restated Allied Capital
    Corporation 12% Senior Subordinated Promissory Note dated
    September 10, 1999(28)                                                                                                 
|        | 4.24 |             |  | Second Amended and Restated Allied Capital
    Corporation Warrant dated October 28, 2003(28)                                                                                                                                       
|        | 4.25 |             |  | Securities Purchase Agreement dated as of
    October 28, 2003 by and among J.H. Whitney Mezzanine Fund,
    L.P. and J.H. Whitney Mezzanine Debt Fund, L.P., Allied Capital
    Corporation and Mercury Air Group, Inc.(28)        
|        | 4.26 |             |  | Second Amended and Restated J.H. Whitney
    Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)                                                                                                                                
|        | 10.1 |             |  | Mercury Air Group, Inc.s 1990 Long-Term
    Incentive Plan.(4)*                                                                                                                                                                    
|        | 10.2 |             |  | Mercury Air Group, Inc.s 1990 Directors
    Stock Option Plan.(1)*                                                                                                                                                                 

21



---



##### Table of Contents



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

22



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                       
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 10.28 |             |  | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of June 27, 2002.(24)                                                                                                                                                                             
|        | 10.29 |             |  | Sale-Leaseback agreement made by and between CFK
    Realty Partners, LLC and Mercury Air Group, Inc. dated
    December 15, 2001.(24)                                                                                                                                                
|        | 10.30 |             |  | Amendment to Sale-Leaseback agreement made by and
    between CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                                                                                                                                                
|        | 10.31 |             |  | Promissory Note by CFK Partners, LLC in favor of
    Mercury Air Group, Inc.(24)                                                                                                                                                                                                      
|        | 10.32 |             |  | Limited Waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as June 27, 2002.(24)                                                                                                                                                                                
|        | 10.33 |             |  | Amendment No. 1 to Amended and Restated
    Employment Agreement dated May 22, 2002 between Mercury Air
    Group, Inc. and Joseph A. Czyzyk.*(24)                                                                                                                                    
|        | 10.34 |             |  | Lease dated December 31, 2001 by and between
    CFK Realty Partners, LLC. and Mercury Air Group, Inc.(30)                                                                                                                                                                            
|        | 10.35 |             |  | Settlement Agreement dated December 12, 2003
    by and among (i) J O Hambro Capital Management Group
    Limited, (ii) J O Hambro Capital Management Limited,
    (iii) American Opportunity Trust PLC, (iv) The Trident
    North Atlantic Fund, and (v) Mercury Air Group, Inc.(29)
|        | 21.1  |             |  | Subsidiaries of Registrant.(30)                                                                                                                                                                                                                                                       
|        | 31.1  |             |  | Section 302 Certification of Chief Executive
    Officer                                                                                                                                                                                                                              
|        | 31.2  |             |  | Section 302 Certification of Chief Financial
    Officer                                                                                                                                                                                                                              
|        | 32.1  |             |  | Section 906 Certification of Chief Executive
    Officer                                                                                                                                                                                                                              
|        | 32.2  |             |  | Section 906 Certification of Chief Financial
    Officer                                                                                                                                                                                                                              
|        | 99.1  |             |  | Partnership Agreement dated as of July 27,
    2000 of CFK Partners by and among Philip J. Fagan, M.D.,
    Frederick H. Kopko, Jr. and Joseph A. Czyzyk.(13)                                                                                                                         



---



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | * | Denotes managements contract or
    compensation plan or arrangement.



| |     |                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Such document was previously filed as
    Appendix A to the Companys Proxy Statement for the
    December 10, 1993 Annual Meeting of Stockholders 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 Stockholders.                                             
|
| | (5) | All such documents were previously filed as
    Exhibits to the Companys Registration Statement
    No. 33-65085 on Form S-1 and are incorporated herein
    by reference.                    
|
| | (6) | All such documents were previously filed as
    Exhibits to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1996 and are
    incorporated herein by reference. 
|
| | (7) | All such documents were previously filed as
    Exhibits to the Companys Report on Form 8-K filed
    September 13, 1996 and are incorporated herein by reference.                            
|
| | (8) | Such document was previously filed as an Exhibit
    to the Companys Annual Report on Form 10-K for the
    year ended June 30, 1997 and is incorporated herein by
    reference.             
|
| | (9) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 1998 and are 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 Stockholders and is
    incorporated herein by reference.

23



---



##### Table of Contents





|     |                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 are 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 are 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 are
    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 are
    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 are 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 are 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 are
    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 Stockholders and is
    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 are
    incorporated herein by reference. 
|    
|(22) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    June 5, 2002 and is incorporated herein by reference.                                       
|    
|(23) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    July 11, 2002 and is incorporated herein by reference.                                      
|    
|(24) | All such documents were previously filed as an
    Exhibit to the Companys Annual Report on Form 10-K
    for the year ended June 30, 2002 and are 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.                                  
|    
|(27) | 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, 2003 and are incorporated
    herein by reference.    
|    
|(28) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    October 28, 2003 and is incorporated herein by reference.                                   
|    
|(29) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    December 12, 2003 and is incorporated herein by reference.                                  
|    
|(30) | 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, 2003 and are incorporated
    herein by reference.           

(b) Reports on Form 8-K:

A Form 8-K was filed dated
September 30, 2003 reporting on Item 5, Other Events
and Regulation FD Disclosure as to preliminary operational
results for the three and twelve-month periods ended
June 30, 2003. An amended report on Form 8-K was filed
on November 19, 2003, amending the previous 8-K to report
the operational results on Item 12.

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##### Table of Contents






SIGNATURES

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



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

Date: January 12, 2004

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