##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended December 31, 2004                                            
|          
|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 No.)
|                                                                                     
|5456 McConnell Avenue
    Los Angeles, CA(Address of principal executive
    offices) |  | 90066(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 February 08, 2004      |          
|                              |  |                              |          
|Common Stock, $0.01 Par Value |  |                              | 3,056,355 | 



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TABLE OF CONTENTS

|              |  |                                                                                           |  |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|              |  |                                                                                           |  | Page |   
|              |  |                                                                                           |  |      |   
|PART I       
|Item 1.       |  | Financial Statements                                                                      |  |      | 2  | 
|Item 2.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 17 | 
|Item 3.       |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |  |      | 26 | 
|Item 4.       |  | Controls and Procedures                                                                   |  |      | 27 | 
|             
|PART II      
|Item 1.       |  | Legal Proceedings                                                                         |  |      | 27 | 
|Item 2.       |  | Unregistered Sales of Equity
    Securities and Use of Proceeds                           |  |      | 28 | 
|Item 3.       |  | Default Upon Senior
    Securities                                                        |  |      | 29 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 29 | 
|Item 5.       |  | Other Information                                                                         |  |      | 29 | 
|Item 6.       |  | Exhibits                                                                                  |  |      | 29 | 
|Signatures    |  |                                                                                           |  |      | 35 | 
|Exhibit 10.43 |  |                                                                                           |  |      |    | 
|Exhibit 31.1  |  |                                                                                           |  |      |    | 
|Exhibit 31.2  |  |                                                                                           |  |      |    | 
|Exhibit 32.1  |  |                                                                                           |  |      |    | 
|Exhibit 32.2  |  |                                                                                           |  |      |    | 



1



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##### 






PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            |  |            |            |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ---------- | ---------- | ---------- |  | ---------- | ---------- | ----------- | 
|                                                                                                                                                                                           |                                                                                                                                                                     | December 31,                                                                           |            |            | June 30,   | 
|                                                                                                                                                                                           |                                                                                                                                                                     | 2004                                                                                   |            |            | 2004       | 
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | (Unaudited)                                                                            |            |            |           
|ASSETS                                                                                                                                                                                    
|CURRENT ASSETS:                                                                                                                                                                            |                                                                                                                                                                     |                                                                                        |            |            |            |  |            |           
|                                                                                                                                                                                           | Cash and cash equivalents                                                                                                                                           |                                                                                        | $          | 6,316,000  |            |  | $          | 4,690,000  |            
|                                                                                                                                                                                           | Restricted cash                                                                                                                                                     |                                                                                        |            |            |            |  |            | 15,414,000 |            
|                                                                                                                                                                                           | Trade accounts receivable, net of allowance for
    doubtful accounts of $1,882,000 and $1,556,000 at
    December 31 and June 30, 2004, respectively               |                                                                                        |            | 56,912,000 |            |  |            | 50,974,000 |            
|                                                                                                                                                                                           | Inventories                                                                                                                                                         |                                                                                        |            | 1,619,000  |            |  |            | 1,165,000  |            
|                                                                                                                                                                                           | Prepaid expenses and other current assets                                                                                                                           |                                                                                        |            | 3,657,000  |            |  |            | 5,696,000  |            
|                                                                                                                                                                                           | Deferred income taxes                                                                                                                                               |                                                                                        |            | 1,451,000  |            |  |            | 1,451,000  |            
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL CURRENT ASSETS                                                                   |            |            | 69,955,000 |  |            |            | 79,390,000  | 
|PROPERTY, EQUIPMENT AND LEASEHOLDS, net of
    accumulated depreciation and amortization of $24,830,000 and
    $24,836,000 at December 31 and June 30, 2004,
    respectively             |                                                                                                                                                                     |                                                                                        | 7,564,000  |            |            |  | 10,349,000 |           
|NOTES RECEIVABLE, net of allowance for doubtful
    accounts of $921,000 and $1,025,000 at December 31 and
    June 30, 2004, respectively                                                 |                                                                                                                                                                     |                                                                                        | 1,296,000  |            |            |  | 521,000    |           
|DEFERRED INCOME TAXES                                                                                                                                                                      |                                                                                                                                                                     |                                                                                        | 611,000    |            |            |  | 611,000    |           
|GOODWILL                                                                                                                                                                                   |                                                                                                                                                                     |                                                                                        | 4,411,000  |            |            |  | 4,389,000  |           
|OTHER INTANGIBLE ASSETS, NET                                                                                                                                                               |                                                                                                                                                                     |                                                                                        | 600,000    |            |            |  | 700,000    |           
|RESTRICTED CASH                                                                                                                                                                            |                                                                                                                                                                     |                                                                                        | 8,418,000  |            |            |  | 8,989,000  |           
|OTHER ASSETS, NET                                                                                                                                                                          |                                                                                                                                                                     |                                                                                        | 1,226,000  |            |            |  | 1,008,000  |           
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL ASSETS                                                                           |            | $          | 94,081,000 |  |            | $          | 105,957,000 | 
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                          
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND STOCKHOLDERS EQUITY                                                                                                          
|CURRENT LIABILITIES:                                                                                                                                                                       |                                                                                                                                                                     |                                                                                        |            |            |            |  |            |           
|                                                                                                                                                                                           | Accounts payable                                                                                                                                                    |                                                                                        | $          | 36,390,000 |            |  | $          | 33,552,000 |            
|                                                                                                                                                                                           | Accrued expenses and other current liabilities                                                                                                                      |                                                                                        |            | 8,559,000  |            |  |            | 11,825,000 |            
|                                                                                                                                                                                           | Current portion of long-term debt                                                                                                                                   |                                                                                        |            | 1,021,000  |            |  |            | 139,000    |            
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL CURRENT LIABILITIES                                                              |            |            | 45,970,000 |  |            |            | 45,516,000  | 
|LONG-TERM DEBT                                                                                                                                                                             |                                                                                                                                                                     |                                                                                        | 21,221,000 |            |            |  | 17,790,000 |           
|DEFERRED GAIN                                                                                                                                                                              |                                                                                                                                                                     |                                                                                        | 9,444,000  |            |            |  | 8,130,000  |           
|OTHER LONG-TERM LIABILITY                                                                                                                                                                  |                                                                                                                                                                     |                                                                                        | 335,000    |            |            |  | 669,000    |           
|DEFERRED RENT                                                                                                                                                                              |                                                                                                                                                                     |                                                                                        | 943,000    |            |            |  | 1,257,000  |           
|MINORITY INTEREST                                                                                                                                                                          |                                                                                                                                                                     |                                                                                        |            |            |            |  | 182,000    |           
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL LIABILITIES                                                                      |            |            | 77,913,000 |  |            |            | 73,544,000  | 
|COMMITMENTS AND CONTINGENT LIABILITIES
    (Note 4)                                                                                                                                        |                                                                                                                                                                     |                                                                                        |            |            |            |  |            |           
|MANDATORILY REDEEMABLE PREFERRED STOCK:
    Series A  $0.01 par value;
    1,000,000 shares authorized; 462,627 shares
    outstanding at December 31 and June 30, 2004,
    respectively |                                                                                                                                                                     |                                                                                        | 468,000    |            |            |  | 518,000    |           
|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; 3,056,355 and
    2,954,819 shares outstanding at December 31 and
    June 30, 2004, respectively |                                                                                        |            | 31,000     |            |  |            | 30,000     |            
|                                                                                                                                                                                           | Additional paid-in capital                                                                                                                                          |                                                                                        |            | 21,473,000 |            |  |            | 20,737,000 |            
|                                                                                                                                                                                           | Retained earnings (accumulated deficit)                                                                                                                             |                                                                                        |            | (2,971,000 | )          |  |            | 14,596,000 |            
|                                                                                                                                                                                           | Accumulated other comprehensive income (loss)                                                                                                                       |                                                                                        |            | 193,000    |            |  |            | (46,000    | )          
|                                                                                                                                                                                           | Treasury stock, 8,750 and 24,500 shares at
    December 31 and June 30, 2004, respectively                                                                          |                                                                                        |            | (43,000    | )          |  |            | (120,000   | )          
|                                                                                                                                                                                           | Notes receivable from officers                                                                                                                                      |                                                                                        |            | (2,983,000 | )          |  |            | (3,302,000 | )          
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL STOCKHOLDERS EQUITY                                                             |            |            | 15,700,000 |  |            |            | 31,895,000  | 
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 
|                                                                                                                                                                                           |                                                                                                                                                                     | TOTAL LIABILITIES, MANDATORILY REDEEMABLE
    PREFERRED STOCK AND STOCKHOLDERS EQUITY |            | $          | 94,081,000 |  |            | $          | 105,957,000 | 
|                                                                                                                                                                                           |                                                                                                                                                                     |                                                                                        |            |            |            | 

See accompanying notes to consolidated financial
statements.

2



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##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |            |            |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------- | ----------- | ------------------ | - | ---------- | ----------- | ----------- | - | -------- | ----------- | ----------- | - | ---------- | ---------- | ---------- | -
|                                           |                                                                                                                                                                             |                                                            |          |            
|                                           |                                                                                                                                                                             | Six Months Ended                                           |          |             | Three Months Ended |  
|                                           |                                                                                                                                                                             | December 31,                                               |          |             | December 31,       |  
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |  
|                                           |                                                                                                                                                                             | 2004                                                       |          |             | 2003               |   |            | 2004        |             |   | 2003     |            
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             |                                                            |          |            
|                                           |                                                                                                                                                                             | (Unaudited)                                                |          |             | (Unaudited)        |  
|Sales and revenues:                        |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|                                           | Sales                                                                                                                                                                       |                                                            | $        | 246,095,000 |                    |   | $          | 139,890,000 |             |   | $        | 137,161,000 |             |   | $          | 74,901,000 |           
|                                           | Service revenues                                                                                                                                                            |                                                            |          | 32,928,000  |                    |   |            | 31,319,000  |             |   |          | 16,371,000  |             |   |            | 16,598,000 |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Total sales and revenues                                   |          |             | 279,023,000        |   |            |             | 171,209,000 |   |          |             | 153,532,000 |   |            |            | 91,499,000 |  
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Costs and expenses:                        |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|                                           | Cost of sales                                                                                                                                                               |                                                            |          | 239,390,000 |                    |   |            | 134,299,000 |             |   |          | 133,350,000 |             |   |            | 71,850,000 |           
|                                           | Operating expenses                                                                                                                                                          |                                                            |          | 30,185,000  |                    |   |            | 29,571,000  |             |   |          | 15,025,000  |             |   |            | 15,821,000 |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Total costs and expenses                                   |          |             | 269,575,000        |   |            |             | 163,870,000 |   |          |             | 148,375,000 |   |            |            | 87,671,000 |  
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Gross margin (excluding depreciation and
    amortization) |          |             | 9,448,000          |   |            |             | 7,339,000   |   |          |             | 5,157,000   |   |            |            | 3,828,000  |  
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Expenses (income):                         |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|                                           | Selling, general and administrative                                                                                                                                         |                                                            |          | 7,028,000   |                    |   |            | 5,044,000   |             |   |          | 4,317,000   |             |   |            | 2,763,000  |           
|                                           | Provision (recovery) for bad debts                                                                                                                                          |                                                            |          | 364,000     |                    |   |            | (24,000     | )           |   |          | 87,000      |             |   |            | (384,000   | )         
|                                           | Depreciation and amortization                                                                                                                                               |                                                            |          | 1,254,000   |                    |   |            | 1,426,000   |             |   |          | 619,000     |             |   |            | 713,000    |           
|                                           | Interest and other expense                                                                                                                                                  |                                                            |          | 771,000     |                    |   |            | 527,000     |             |   |          | 443,000     |             |   |            | 267,000    |           
|                                           | Hambro settlement costs                                                                                                                                                     |                                                            |          |             |                    |   |            | 1,799,000   |             |   |          |             |             |   |            | 1,799,000  |           
|                                           | Interest and other income                                                                                                                                                   |                                                            |          | (241,000    | )                  |   |            | (241,000    | )           |   |          | (17,000     | )           |   |            | (32,000    | )         
|                                           | Asset impairment loss                                                                                                                                                       |                                                            |          | 626,000     |                    |   |            |             |             |   |          |             |             |   |            |            |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Total expenses (income)                                    |          |             | 9,802,000          |   |            |             | 8,531,000   |   |          |             | 5,449,000   |   |            |            | 5,126,000  |  
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           | Loss from continuing operations before minority
    interest and income tax expense                                                                                         |                                                            |          | (354,000    | )                  |   |            | (1,192,000  | )           |   |          | (292,000    | )           |   |            | (1,298,000 | )         
|                                           | Minority interest                                                                                                                                                           |                                                            |          | 181,000     |                    |   |            | 4,000       |             |   |          |             |             |   |            | (2,000     | )         
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           | Loss from continuing operations before income tax
    expense                                                                                                               |                                                            |          | (173,000    | )                  |   |            | (1,188,000  | )           |   |          | (292,000    | )           |   |            | (1,300,000 | )         
|                                           | Income tax (benefit) expense                                                                                                                                                |                                                            |          | (25,000     | )                  |   |            | 239,000     |             |   |          | (80,000     | )           |   |            | 195,000    |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           | Loss from continuing operations, net of taxes                                                                                                                               |                                                            |          | (148,000    | )                  |   |            | (1,427,000  | )           |   |          | (212,000    | )           |   |            | (1,495,000 | )         
|                                           | Discontinued operations:                                                                                                                                                    |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |            |           
|                                           | Loss from discontinued operation, net of income
    tax (benefit) of ($251,000) and ($14,000) for the six months and
    three months ended December 31, 2003, respectively |                                                            |          |             |                    |   |            | (392,000    | )           |   |          |             |             |   |            | (22,000    | )         
|                                           | Gain on sale of discontinued operations, net of
    income tax provision of $14,000                                                                                         |                                                            |          | 22,000      |                    |   |            |             |             |   |          | 22,000      |             |   |            |            |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Net loss                                   |                                                                                                                                                                             |                                                            | (126,000 | )           |                    |   | (1,819,000 | )           |             |   | (190,000 | )           |             |   | (1,517,000 | )         
|Accrued preferred stock dividends          |                                                                                                                                                                             |                                                            | 20,000   |             |                    |   | 19,000     |             |             |   | 11,000   |             |             |   | 9,000      |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Net loss applicable to common stockholders |                                                                                                                                                                             | $                                                          | (146,000 | )           |                    | $ | (1,838,000 | )           |             | $ | (201,000 | )           |             | $ | (1,526,000 | )         
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Income (loss) per common share:            |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|Basic:                                     |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|                                           | From continuing operations, net of taxes                                                                                                                                    |                                                            | $        | (0.06       | )                  |   | $          | (0.45       | )           |   | $        | (0.08       | )           |   | $          | (0.47      | )         
|                                           | From discontinued operations, net of taxes                                                                                                                                  |                                                            |          |             |                    |   |            | (0.12       | )           |   |          |             |             |   |            | (0.01      | )         
|                                           | From sale of discontinued operations, net of taxes                                                                                                                          |                                                            |          | 0.01        |                    |   |            |             |             |   |          | 0.01        |             |   |            |            |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Net loss per share                                         |          | $           | (0.05              | ) |            | $           | (0.57       | ) |          | $           | (0.07       | ) |            | $          | (0.48      | )
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|Diluted:                                   |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |             |             |   |            |           
|                                           | From continuing operations, net of taxes                                                                                                                                    |                                                            | $        | (0.06       | )                  |   | $          | (0.45       | )           |   | $        | (0.08       | )           |   | $          | (0.47      | )         
|                                           | From discontinued operations, net of taxes                                                                                                                                  |                                                            |          |             |                    |   |            | (0.12       | )           |   |          |             |             |   |            | (0.01      | )         
|                                           | From sale of discontinued operations, net of taxes                                                                                                                          |                                                            |          | 0.01        |                    |   |            |             |             |   |          | 0.01        |             |   |            |            |           
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            
|                                           |                                                                                                                                                                             | Net loss per share                                         |          | $           | (0.05              | ) |            | $           | (0.57       | ) |          | $           | (0.07       | ) |            | $          | (0.48      | )
|                                           |                                                                                                                                                                             |                                                            |          |             |                    |   |            |             |             |   |          |            

See accompanying notes to consolidated financial
statements.

3



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##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                   |                                                                |                                                   |                                                         |             |            |            |           |            |            |            |  
|-------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------- | ----------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                                   |                                                                |                                                  
|                                                   |                                                                | Six Months Ended December 31,                     |                                                        
|                                                   |                                                                |                                                   |                                                        
|                                                   |                                                                | 2004                                              |                                                         |             | 2003       |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|                                                   |                                                                |                                                  
|                                                   |                                                                | (Unaudited)                                       |                                                        
|CASH FLOWS FROM OPERATING
    ACTIVITIES:          |                                                                |                                                   |                                                         |             |            |            |           |           
|                                                   | Net loss                                                       |                                                   | $                                                       | (126,000    | )          |            | $         | (1,819,000 | )         
|                                                   | Adjustments to derive cash flow from operating
    activities: |                                                   |                                                         |             |            |            |           |            |           
|                                                   |                                                                | Provision for bad debts                           |                                                         |             | 364,000    |            |           |            | 60,000     |           
|                                                   |                                                                | Depreciation and amortization                     |                                                         |             | 1,254,000  |            |           |            | 4,279,000  |           
|                                                   |                                                                | Deferred income taxes                             |                                                         |             |            |            |           |            | (1,001,000 | )         
|                                                   |                                                                | Deferred rent                                     |                                                         |             | (648,000   | )          |           |            | (314,000   | )         
|                                                   |                                                                | Executive loan amortization                       |                                                         |             | 180,000    |            |           |            | 194,000    |           
|                                                   |                                                                | Minority interest                                 |                                                         |             | (181,000   | )          |           |            | 15,000     |           
|                                                   |                                                                | Other non-cash items                              |                                                         |             | 80,000     |            |           |            | (1,000     | )         
|                                                   |                                                                | Asset impairment loss                             |                                                         |             | 626,000    |            |           |            |            |           
|                                                   |                                                                | Hambro settlement costs                           |                                                         |             |            |            |           |            | 1,799,000  |           
|                                                   |                                                                | Amortization of senior subordinated note discount |                                                         |             |            |            |           |            | 88,000     |           
|                                                   |                                                                | Write-down of note receivable from officer        |                                                         |             | 96,000     |            |           |            | 105,000    |           
|                                                   | Changes in operating assets and liabilities:                   |                                                   |                                                         |             |            |            |           |            |           
|                                                   |                                                                | Trade and other accounts receivable               |                                                         |             | (7,100,000 | )          |           |            | (5,343,000 | )         
|                                                   |                                                                | Inventories                                       |                                                         |             | (454,000   | )          |           |            | 388,000    |           
|                                                   |                                                                | Prepaid expenses and other current assets         |                                                         |             | 1,431,000  |            |           |            | (35,000    | )         
|                                                   |                                                                | Accounts payable                                  |                                                         |             | 2,838,000  |            |           |            | 2,672,000  |           
|                                                   |                                                                | Accrued expenses and other current liabilities    |                                                         |             | (3,386,000 | )          |           |            | 3,437,000  |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|                                                   |                                                                |                                                   | Net cash provided by (used in) operating
    activities |             |            | (5,026,000 | )         |            |            | 4,524,000  |  
|                                                   |                                                                |                                                   |                                                         |             |            |           
|CASH FLOWS FROM INVESTING
    ACTIVITIES:          |                                                                |                                                   |                                                         |             |            |            |           |           
|                                                   | Decrease in restricted cash                                    |                                                   |                                                         | 16,029,000  |            |            |           |            |           
|                                                   | Decrease (increase) in other assets                            |                                                   |                                                         | (294,000    | )          |            |           | 252,000    |           
|                                                   | Decrease in notes receivable                                   |                                                   |                                                         | 534,000     |            |            |           | 576,000    |           
|                                                   | Proceeds from sale of property                                 |                                                   |                                                         | 2,000       |            |            |           | 9,000      |           
|                                                   | Additions to property, equipment and leaseholds                |                                                   |                                                         | (1,125,000  | )          |            |           | (2,638,000 | )         
|                                                   |                                                                |                                                   |                                                         |             |            |           
|                                                   |                                                                |                                                   | Net cash provided by (used in) investing
    activities |             |            | 15,146,000 |           |            |            | (1,801,000 | )
|                                                   |                                                                |                                                   |                                                         |             |            |           
|CASH FLOWS FROM FINANCING
    ACTIVITIES:          |                                                                |                                                   |                                                         |             |            |            |           |           
|                                                   | Net addition (reduction) of debt instruments                   |                                                   |                                                         | 7,990,000   |            |            |           | (2,278,000 | )         
|                                                   | Repurchase of common stock                                     |                                                   |                                                         | (830,000    | )          |            |           |            |           
|                                                   | Payment of dividends                                           |                                                   |                                                         | (17,491,000 | )          |            |           |            |           
|                                                   | Proceeds from exercise of stock options and
    warrants       |                                                   |                                                         | 1,687,000   |            |            |           | 14,000     |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|                                                   |                                                                |                                                   | Net cash used in financing activities                   |             |            | (8,644,000 | )         |            |            | (2,264,000 | )
|                                                   |                                                                |                                                   |                                                         |             |            |           
|Effect of exchange rate changes                    |                                                                |                                                   | 150,000                                                 |             |            |            | 126,000   |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|NET INCREASE IN CASH AND CASH
    EQUIVALENTS      |                                                                |                                                   | 1,626,000                                               |             |            |            | 585,000   |           
|CASH AND CASH EQUIVALENTS, BEGINNING OF
    PERIOD |                                                                |                                                   | 4,690,000                                               |             |            |            | 2,802,000 |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|CASH AND CASH EQUIVALENTS, END OF
    PERIOD       |                                                                | $                                                 | 6,316,000                                               |             |            | $          | 3,387,000 |           
|                                                   |                                                                |                                                   |                                                         |             |            |           
|CASH PAID DURING THE PERIOD FOR:                   |                                                                |                                                   |                                                         |             |            |            |           |           
|                                                   | Interest                                                       |                                                   | $                                                       | 541,000     |            |            | $         | 2,952,000  |           
|                                                   | Income taxes                                                   |                                                   | $                                                       | 2,964,000   |            |            | $         | 726,000    |           

Non-Cash investing and financing activities are
excluded from the consolidated statement of cash flows. On
November 10, 2004, the Company entered into an amended
lease agreement with CFK Realty and amended the terms of the
note receivable due from CFK Realty. The Company reduced the
note receivable from CFK Realty by $796,000 and reduced the
deferred gain on sale of the building by the same amount. See
Note 11. During the quarter, the Company upgraded its 12.5%
ownership interest in a BeechJet 400A aircraft to a 12.5%
interest in a Raytheon Hawker 800XP. The Company received a
$443,750 trade-in allowance for its 12.5% ownership in the
Beechjet.

See accompanying notes to consolidated financial
statements.

4



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                          |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |   |  |   |         |         |  |   |             |          |         | 
|----------------------------------------- | --------------------------------------- | -------------------- | --------- | - | ---------- | - | ------- | ------- | ----- | ---------- | ---------- | ----------- | ---- | -------- | ------------- | -------- | ----- | - | ---------- | ------ |  | - | -------- | - |  | - | ------- | ------- |  | - | ----------- | -------- | ------- | 
|                                          |                                         |                      |           |   |            |   |         |         |       |            |            | Accumulated |      |          |              
|                                          |                                         | Common Stock         |           |   |            |   |         |         | Notes |            |            |             |      | Other    |               |          |      
|                                          |                                         |                      |           |   | Additional |   |         |         |       | Receivable |            |             |      |          | Comprehensive |          |       |  
|                                          |                                         | Number of            |           |   |            |   | Paid-In |         |       | Retained   |            |             | From |          |               | Treasury |       |   | Income     |        |  |  
|                                          |                                         | Shares               |           |   | Amount     |   |         | Capital |       |            | Earnings   |             |      | Officers |               |          | Stock |   |            | (Loss) |  |   | Total    |  
|                                          |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |  
|Balances, June 30, 2004                   |                                         |                      | 2,954,819 |   |            | $ | 30,000  |         |       | $          | 20,737,000 |             |      | $        | 14,596,000    |          |       | $ | (3,302,000 | )      |  | $ | (120,000 | ) |  | $ | (46,000 | )       |  | $ | 31,895,000  |         
|Comprehensive income (loss):              |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |   |  |   |         |         |  |   |             |         
|                                          | Net income                              |                      |           |   |            |   |         |         |       |            |            |             |      |          |               | (126,000 | )     |   |            |        |  |   |          |   |  |   |         |         |  |   |             | (126,000 | )      
|                                          | Foreign currency translation adjustment |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |   |  |   |         | 239,000 |  |   |             | 239,000  |        
|                                          |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |  
|                                          |                                         | Comprehensive income |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |   |  |   |         |         |  |   |             |          | 113,000 | 
|Cash dividend common $5.70 per share      |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          | (17,421,000   | )        |       |   |            |        |  |   |          |   |  |   |         |         |  |   | (17,421,000 | )       
|Accrual of preferred stock dividends      |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          | (20,000       | )        |       |   |            |        |  |   |          |   |  |   |         |         |  |   | (20,000     | )       
|Amort. of note from executive stock plan  |                                         |                      | (150,000  | ) |            |   | (2,000  | )       |       |            | (808,000   | )           |      |          |               |          |       |   | 179,000    |        |  |   |          |   |  |   |         |         |  |   | (631,000    | )       
|Repurchase of vested executive stock      |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   | (20,000  | ) |  |   |         |         |  |   | (20,000     | )       
|Exercise of options/warrants              |                                         |                      | 279,036   |   |            |   | 3,000   |         |       |            | 1,684,000  |             |      |          |               |          |       |   |            |        |  |   |          |   |  |   |         |         |  |   | 1,687,000   |         
|Write off officer note                    |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   | 140,000    |        |  |   | (43,000  | ) |  |   |         |         |  |   | 97,000      |         
|Retirement of repurchased executive stock |                                         |                      | (27,500   | ) |            |   |         |         |       |            | (140,000   | )           |      |          |               |          |       |   |            |        |  |   | 140,000  |   |  |   |         |         |  |   |             |         
|                                          |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |  
|Balances, December 31, 2004               |                                         |                      | 3,056,355 |   |            | $ | 31,000  |         |       | $          | 21,473,000 |             |      | $        | (2,971,000    | )        |       | $ | (2,983,000 | )      |  | $ | (43,000  | ) |  | $ | 193,000 |         |  | $ | 15,700,000  |         
|                                          |                                         |                      |           |   |            |   |         |         |       |            |            |             |      |          |               |          |       |   |            |        |  |   |          |  

5



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2004


(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 three principal operating units which are all
wholly owned subsidiaries of the Company: MercFuel, Inc.
(MercFuel), a Delaware corporation, Mercury Air
Cargo, Inc. (Air Cargo), a California corporation,
and Maytag Aircraft Corporation (Maytag), a Colorado
corporation. MercFuels operations consist of the sale and
delivery of fuel, primarily aviation fuel, to domestic and
international commercial airlines, fractional jet ownership
companies, corporate aviation fleets and air cargo companies.
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. Maytag
is a provider of governmental contract services performing
aircraft refueling and fuel storage operations, base operations
support (BOS) services, air terminal and ground
handling services and weather observation and forecasting
services primarily for agencies of the government of the United
States of America.

Through April 12, 2004, the Company operated
a fourth operating unit, Mercury Air Centers, Inc. (Air
Centers). Air Centers operations consisted of
aviation fuel sales, aircraft refueling operations
(into-plane), aircraft ground support services,
aircraft hangar services, aircraft parking (aircraft
tie-down services) and aircraft maintenance at certain Air
Center locations, known as Fixed Based Operations
(FBOs). On April 12, 2004 (the FBO
Sale Closing Date), following stockholder approval, the
Company sold all of Air Centers outstanding common stock to
Allied Capital Corporation (Allied) for $76,349
thousand subject to adjustments for, among other things, Air
Centers net working capital as of the FBO Sale Closing
Date and the distribution of funds from an escrow account
established at closing associated with the Air Centers
Hartsfield International Airport FBO (the Hartsfield
FBO). The net working capital adjustment was finalized
during the second quarter of fiscal 2005. See Note 12 for
details. The assets sold through the sale of the stock of Air
Centers (the FBO Sale) consisted of all of the
assets of the Companys FBO business excluding the
Companys FBO at the Long Beach Airport which the Company
has retained and continues to operate.

As used in this Quarterly Report on
Form 10-Q, the term Company or
Mercury refers to Mercury Air Group, Inc. and,
unless the context otherwise requires, its subsidiaries. The
Companys principal executive offices are located at 5456
McConnell Avenue, Los Angeles, California, 90066 and its
telephone number is (310) 827-2737.



| |                           
| | --------------------------
| | Forward-Looking Statements

This Quarterly Report on Form 10-Q and the
information incorporated by reference in it includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We
intend the forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements in these
sections. All statements regarding our expected financial
position and operating results, our business strategy, our
financing plans and forecasted demographic and economic trends
relating to our industry are forward-looking statements. These
statements can sometimes be identified by our use of
forward-looking words such as may, will,
anticipate, estimate, expect
or intend and similar expressions. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
to be materially different from the results, performance or
achievements expressed or implied by the forward-looking
statements. We cannot promise you that our expectations in such
forward-looking statements will turn out correct. Factors that
impact such forward-looking statements include, but are not
limited to, quarterly fluctuations in results; the management of
growth; fluctuations in world oil prices, interest rates or
foreign

6



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

currency; changes in political, economic,
regulatory or environmental conditions; the loss of key
customers, suppliers or members of senior management; uninsured
losses; competition; credit risk associated with accounts
receivable; Sarbanes-Oxley Act Section 404 compliance
costs, and other risks detailed in this Quarterly Report on
Form 10-Q and in our other Securities and Exchange
Commission filings. We undertake no obligation to update or
revise publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise.



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

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
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 aviation 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 aviation fuel on
favorable terms or may experience difficulty in obtaining
aviation fuel from alternative suppliers. Furthermore,
difficulties faced by these suppliers or aviation fuel shortages
or the inability to obtain aviation fuel from alternate sources
at acceptable prices and terms could impair the Companys
ability to sell aviation fuel to its customers at competitive
prices and terms.

The Company may experience decreases in future
sales volume and margins as a result of deterioration in the
world economy, or in the aviation industry, and continued
conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist
activities and possible military retaliation. Through the
Companys first six months of fiscal 2005, petroleum
product prices, including aviation fuel, have either achieved or
been close to historical high levels. This sustained price level
places additional financial burden on many of the Companys
customers. If the Companys customers are not able to pass
on the higher petroleum product prices to its customers, they
may experience financial hardship which may result in the
Company experiencing longer collection terms, which will place
additional financial burden on the Company, or higher level of
uncollectible accounts.



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying unaudited financial statements
of the Company have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by 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, 2005 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, 2004.

7



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment
(SFAS No. 123R). This standard requires
companies to expense the value of employee stock options and
similar awards. Under SFAS No. 123R, share-based
payments (SBP) awards result in a cost that will be
measured at fair value on the awards grant date, based on
the estimated number of awards that are expected to vest.
Compensation cost for awards that vest would not be reversed if
the awards expire without being exercised. When measuring fair
value, companies can choose an option-pricing model (e.g.,
Black-Scholes or binomial models) that appropriately reflects
their specific circumstances and the economics of their
transactions. Companies will recognize compensation cost for SBP
awards as they vest including the related tax effects. Upon
settlement of SBP awards, the tax effects will be recognized in
the income statement or additional paid-in capital. Public
companies are allowed to select from three alternative
transition methods. The effective date for public companies is
interim and annual periods beginning after June 15, 2005,
and applies to all outstanding and unvested SBP awards at a
companys adoption date. The Company is currently
evaluating the potential impact of the adoption of
SFAS 123R.



|         |                                  
|-------- | ---------------------------------
|Note 2  | Stock-Based Employee Compensation

The Company has four stock option plans. As
permitted under SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123), and as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure
(SFAS No. 148), the Company measures
compensation expense related to employee stock options granted
utilizing the intrinsic value method as prescribed by Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. The following table illustrates the pro
forma effect on net income (loss) if the Company had applied the
fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.

|                                                                                                                             |  |                  |          |   |                    |   |            |      |  |   |          |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------------ | - | ---------- | ---- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                                             |  |                  |          |  
|                                                                                                                             |  | Six Months Ended |          |   | Three Months Ended |  
|                                                                                                                             |  | December 31,     |          |   | December 31,       |  
|                                                                                                                             |  |                  |          |   |                    |  
|                                                                                                                             |  | 2004             |          |   | 2003               |   |            | 2004 |  |   | 2003     |  
|                                                                                                                             |  |                  |          |   |                    |   |            |      |  |   |          |  
|Net loss, as reported                                                                                                        |  | $                | (126,000 | ) |                    | $ | (1,819,000 | )    |  | $ | (190,000 | ) |  | $ | (1,517,000 | )
|Add stock-based employee compensation expense
    included in net loss, net of tax                                           |  |                  | 96,000   |   |                    |   | 123,000    |      |  |   | 48,000   |   |  |   | 61,000     |  
|Less total stock based employee compensation
    determined under the fair value based method for all awards, net
    of tax |  |                  | (11,000  | ) |                    |   | (59,000    | )    |  |   | (2,000   | ) |  |   | (27,000    | )
|                                                                                                                             |  |                  |          |   |                    |   |            |      |  |   |          |  
|Pro forma net loss                                                                                                           |  | $                | (41,000  | ) |                    | $ | (1,755,000 | )    |  | $ | (144,000 | ) |  | $ | (1,483,000 | )
|                                                                                                                             |  |                  |          |   |                    |   |            |      |  |   |          |  
|Basic net loss per share  as reported                                                                                       |  | $                | (0.05    | ) |                    | $ | (0.57      | )    |  | $ | (0.07    | ) |  | $ | (0.48      | )
|Basic net loss per share  pro forma                                                                                         |  | $                | (0.02    | ) |                    | $ | (0.55      | )    |  | $ | (0.05    | ) |  | $ | (0.47      | )
|Diluted net loss per share  as reported                                                                                     |  | $                | (0.05    | ) |                    | $ | (0.57      | )    |  | $ | (0.07    | ) |  | $ | (0.48      | )
|Diluted net loss per share  pro forma                                                                                       |  | $                | (0.02    | ) |                    | $ | (0.55      | )    |  | $ | (0.05    | ) |  | $ | (0.47      | )



|         |             
|-------- | ------------
|Note 3  | Income Taxes

Income tax expense has been computed based on the
estimated annual effective income tax rate for the respective
periods adjusted for significant events that have occurred
during the respective periods that are not expected to recur in
future periods. The effective income tax rate from continuing
operations was 27.6% (benefit) and 13.5% (expense) for the three
month periods ended December 31, 2004 and 2003,
respectively.

8



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The effective income tax rate from continuing
operations was 14.7% (benefit) and 0.7% (benefit) for the six
month periods ended December 31, 2004 and 2003,
respectively.

The effective income tax rate from continuing
operations for the three month and six month periods ended
December 31, 2003 included the results of operations for
the Air Centers. The consolidated statements of operations for
the three month and six month periods ended December 31,
2003 was restated to reflect the Air Center results as
Discontinued Operations. With this restatement, the
effective tax rate from continuing operations for the three
month and six month periods ended December 31, 2004 would
have been 15.0% and 20.1% expense, respectively, and 39.0% and
39.0% benefit, respectively, for discontinued operations.

The settlement costs related to J.O. Hambro of
$1,799 thousand recognized by the Company in the second quarter
of fiscal 2004 is not deductible in the determination of taxable
income resulting in a permanent book to tax difference. The
difference resulted in an increase in the income tax provision
for the three and six month periods ended December 31, 2003.



|         |           
|-------- | ----------
|Note 4  | Litigation

On March 14, 2003, the Company received a
Notice of Violation from the United States Environmental
Protection Agency (EPA) alleging certain
deficiencies in the Companys spill prevention, control and
countermeasure plan (SPCC Plan) for the Air
Centers Fort Wayne, Indiana facility. The Company
believes that it has resolved all deficiencies except for
alleged deficiencies related to: 1) secondary containment
for refueling trucks, and 2) secondary containment for
discrete fuel loading areas. Pursuant to an agreement detailed
in a letter submitted to the EPA on April 16, 2003, the
Company was permitted to suspend modifications to its SPCC Plan
regarding the installation of secondary containment for its
parked refueling trucks and loading areas, pending resolution of
federal regulatory issues associated with SPCC requirements.

The Stock Purchase Agreement between the Company
and Allied dated as of October 28, 2003 regarding the sale
of all of the outstanding stock owned by the Company in Air
Centers (the Air Centers SPA), provides that
the Company shall be responsible for compliance, for a period of
eighteen months subsequent to the FBO Sale Closing Date, for any
required secondary containment (as the term is defined in the
Air Centers SPA) required by any applicable governmental
authority requiring secondary containment pursuant to
environmental law for extended or overnight fuel truck parking
at any FBO comprising the FBO business on the FBO Sale Closing
Date.

Pursuant to a letter dated October 18, 2004
from the EPA to the Air Centers Ft. Wayne facility
(the Facility), the EPA demanded the installation of
secondary containment at the Facility for parked refueling
trucks. While the Company does not believe SPCC requirements
regarding containment are applicable to mobile refueling trucks,
it has agreed to indemnify Air Centers for the reasonable cost
of installation of such containment at the Facility in order to
avoid further transaction costs.

In the opinion of management, the ultimate
resolution of this matter, including the installation of any
secondary containment at other Air Centers facilities, is not
expected to have a material effect on the Companys results
of operations, cash flows or financial position.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Air Centers and
Allied alleging: 1) breach of contract against Mercury Air
Centers; 2) tortious interference with contract against
Allied; 2) Tortious interference with prospective economic
advantage against Allied; and 3) unfair business practices
against Mercury and Allied. 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, losses or expenses to which Allied may become
subject as a result of the complaint. On January 26, 2005
the court granted Allieds motion for summary judgment
dismissing all claims against Allied with prejudice. The Court
also granted Mercury Air Centers motion in part dismissing in
its entirety Signatures unfair business practices claim
and holding that

9



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the substantive deal terms of the parties
executed letter of intent were non-binding. The sole remaining
claim of Signature is for breach of the stand-down provision
within the disputed letter of intent between the parties. The
court limited Signatures damages in that claim to
reasonable out of pocket costs and expenses. This remaining
claim is currently set for trial on March  15, 2005 in
Los Angeles federal court. In addition, on September 22,
2004, Signature Flight Support Corporation filed a complaint
against Mercury Air Group, Inc. in Los Angeles Superior Court,
alleging unfair business practices, tortious interference with
contract and prospective economic advantage and fraud. The
Company has filed a counterclaim against Signature Flight
Support Corporation and others for fraud, negligent
misrepresentation and other claims in the Los Angeles Superior
Court action. Signature filed an amended complaint on or about
February 1, 2005. The Company believes these allegations
have no merit and will also be vigorously disputed and defended.
In the opinion of management, the ultimate resolution of these
complaints will not have a material effect on the Companys
consolidated financial statements.

On July 14, 2004, Leon Shabott filed suit in
the United States District Court, District of Massachusetts
against Mercury Air Group, Inc. for damages arising out of the
repair of Beechcraft twin Bonanza aircraft engines in June of
1998 claiming damages of up to $150 thousand. The Company
believes that the claim is barred by the statute of limitations
and that it has other good and viable defenses as well. In the
opinion of management, the ultimate resolution of this matter is
not expected to have a material effect on the Companys
results of operations, cash flows or financial position.

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 the Companys
results of operations, cash flows or financial position.
Reference is made to the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2004 for
additional legal matters with respect to which no material
developments have occurred in the current quarter.



|         |                
|-------- | ---------------
|Note 5  | Restricted Cash

Restricted cash consists of cash held for
specific purposes and not available for general use by the
Company. Restricted cash as of December 31, 2004 is
comprised of: 1) $98 thousand on deposit with Wells Fargo
Foothill as reserve for outstanding letters of credit fees; and
2) $8,320 thousand for an escrow account established on the
FBO Sale Closing Date associated with the Hartsfield FBO (the
Harstfield Escrow Account). The funds held in the
Hartsfield Escrow Account are to be distributed to either one or
both of the Company and Allied over a period not to exceed five
years from the FBO Sale Closing Date dependent upon the award of
a new lease at the Hartsfield International Airport in Atlanta
for a new FBO. Dependent upon the effective date of the new
lease and the terms and conditions of the new lease, the Company
may be entitled to all, some or none of the amount deposited
into the Hartsfield Escrow Account at closing.

On October 11, 2004, the city of Atlanta
notified Air Centers that it planned on entering into lease
negotiations with a different company for the FBO at the
Hartsfield International Airport under the then existing RFP
process. On November 22, 2004, Air Centers was notified by
the airport authority that the matter would be re-bid. If a new
FBO lease at the Hartsfield International Airport is not awarded
to Air Centers, the amount remaining undistributed in the
Hartsfield Escrow Account on the date that Air Centers ceases
operating the Hartsfield FBO will be distributed to Allied.
Although no assurance can be given by the Company that Air
Centers will be operating the Hartsfield FBO on April 12,
2005, if Air Centers is still operating the Hartsfield FBO under
the existing lease terms and conditions on April 12, 2005,
the Company will be entitled to receive $1,654 thousand from the
Hartsfield Escrow Account.



|         |     
|-------- | ----
|Note 6  | Debt

On July 29, 2004, the Company and Bank of
America, N.A. (Bank of America) entered into a
three-year $30,000 thousand revolving line of credit (the
B of A Credit Facility) collateralized by all of the
assets

10



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the Company, the terms of which were amended
by the First Amendment to the Loan Agreement effective
November 1, 2004 (the First Amendment). The
loan agreement, as amended by the First Amendment, will expire
on July 31, 2007, or earlier under certain conditions. Upon
the effective date of the B of A Credit Facility, $15,414
thousand of cash deposited by the Company as collateral for
outstanding letters of credit and reported as restricted cash on
the Companys balance sheet at June 30, 2004 was
released to the Company for general corporate purposes. In
accordance with the terms of the loan agreement, as amended, the
revolving line of credit is used as collateral for any letter of
credit issued by the Company and for general working capital
needs. The amount of credit available to the Company on the B of
A Credit Facility, as amended, is determined monthly and is
equal to the lesser of 1) sum of: a) 80% of the
balance due on Domestic Eligible Receivables less b) $2,000
thousand; and 2) $30,000 thousand. The B of A Credit
Facility, as amended, contains certain financial covenants
limiting the amount the Company can expend annually for capital
expenditures to $2,000 thousand. The B of A Credit Facility, as
amended, also prohibits the repurchase of stock and the payment
of cash dividends, except for cash dividends in an amount not to
exceed $17,500 thousand by June 30, 2005. The Company is
also required to maintain certain financial targets for tangible
net worth and fixed charges. The Company is in compliance with
all of the terms and conditions of the B of A Credit Facility.

On November 2, 2004, the Company requested
and received a cash advance on the B of A Credit Facility in the
amount of $10,000 thousand. The funds received as a cash advance
were used to fund the one-time special cash dividend and to meet
on-going working capital requirements. As of December 31,
2004, the Companys borrowing under the revolving credit
line was $8,000 thousand.

As of December 31, 2004, the Company had
$26,254 thousand of revolving credit line available under the B
of A Credit Facility, of which $15,323 thousand was reserved for
issued and outstanding letters of credit and $2,931 thousand was
available and undrawn.

On November 1, 2004, the Company and Bank of
America entered into a Letter of Credit and Reimbursement
Agreement (the LOC and Reimbursement Agreement)
relating to the outstanding tax exempt bonds issued in 1998
pursuant to a loan agreement between the Company and the
California Economic Development Financing Authority
(CEDFA). As of November 1, 2004, the
outstanding principal amount of the bonds outstanding was
$14,000 thousand. In accordance with the terms of the LOC and
Reimbursement Agreement, Bank of America has issued an
irrevocable direct pay letter of credit to the trustee for the
bondholders in an amount of $14,161 thousand (the CEDFA
LOC) that replaced the previously existing irrevocable
direct pay letter of credit of the same amount issued by Wells
Fargo Bank, N.A. on behalf of the Company, which was cancelled
simultaneously with the issuance of the CEDFA LOC. In addition
to the issuance of the CEDFA LOC, the LOC and Reimbursement
Agreement require the Company to call for redemption bonds in
the principal amount of $500 thousand on each of April 1
and October 1 commencing on April 1, 2005. The CEDFA
LOC was issued by Bank of America as part of the B of A Credit
facility.



|         |                                
|-------- | -------------------------------
|Note 7  | Impairment of Long-Lived Assets

The Company owned a 69.6% equity interest in
MercMed LLC (MercMed), which was formed in 1998 for
the purpose of owning and operating an aircraft for the MercMed
members. As a result of the age of the MercMed aircraft, changes
in Federal Aviation Administration requirements restricting the
altitude at which the MercMed aircraft can fly, the popularity
of fractional jet ownership versus outright aircraft ownership
and the technological advancements in aircraft design and
construction, it was determined that the current market value of
the MercMed aircraft was below the carrying value of the
aircraft. During the first quarter of fiscal 2005, the book
value of the MercMed aircraft was adjusted to reflect the
current market value as determined by the MercMed members, which
was determined to be $532 thousand. This adjustment to market
value resulted in an asset impairment loss of $626 thousand.

11



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On November 10, 2004, the Company, upon
authorization from the Companys Board of Directors,
entered into an agreement to sell all of its rights, title and
interest in MercMed to Dr. Fagan. In accordance with the
agreement between the Company and Dr. Fagan, the Company
has agreed to pay for certain costs incurred by MercMed prior to
October 1, 2004 and to provide Dr. Fagan with jet fuel
in an amount not to exceed $75 thousand over a five year period.
Dr. Fagan has agreed to pay the debt service costs,
including the outstanding principal associated with
MercMeds loan and to hold the Company harmless in regard
to this loan. As of December 31, 2004, the financial
statements of MercMed are no longer included in the
Companys consolidated financial statements.



|         |                            
|-------- | ---------------------------
|Note 8  | Net Income (Loss) Per Share

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

|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |       |   |   |            |       |   |   |            |       |  
|------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------- | --------- | ----- | ------------------------------- | - | --------- | ----- | - | - | ---------- | ----- | - | ----- | ---------- | ----- | ------- | - | --------- | ----- | - | - | --------- | ----- | - | - | ---------- | ----- | - | - | ---------- | ----- | -
|                                                                          |                                                    |                               |           |      
|                                                                          |                                                    | Six Months Ended December 31, |           |       | Three Months Ended December 31, |  
|                                                                          |                                                    |                               |           |       |                                 |  
|                                                                          |                                                    |                               |           |       |                                 |   |           |      
|                                                                          |                                                    | 2004                          |           |       | 2003                            |   |           | 2004  |   |   | 2003       |      
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |      
|                                                                          |                                                    | Basic                         |           |       | Diluted                         |   |           | Basic |   |   | Diluted    |       |   | Basic |            |       | Diluted |   |           | Basic |   |   | Diluted   |      
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |      
|Weighted average number of common stock
    outstanding during the period |                                                    |                               | 2,880,900 |       |                                 |   | 2,880,900 |       |   |   | 3,220,000  |       |   |       | 3,220,000  |       |         |   | 2,987,300 |       |   |   | 2,987,300 |       |   |   | 3,203,200  |       |   |   | 3,203,200  |      
|Loss from continuing operations, net of taxes                             |                                                    | $                             | (148,000  | )     |                                 | $ | (148,000  | )     |   | $ | (1,427,000 | )     |   | $     | (1,427,000 | )     |         | $ | (212,000  | )     |   | $ | (212,000  | )     |   | $ | (1,495,000 | )     |   | $ | (1,495,000 | )    
|Preferred stock dividends                                                 |                                                    |                               | 20,000    |       |                                 |   | 20,000    |       |   |   | 19,000     |       |   |       | 19,000     |       |         |   | 11,000    |       |   |   | 11,000    |       |   |   | 9,000      |       |   |   | 9,000      |      
|Loss from discontinued operation, net of taxes                            |                                                    |                               |           |       |                                 |   |           |       |   |   | (392,000   | )     |   |       | (392,000   | )     |         |   |           |       |   |   |           |       |   |   | (22,000    | )     |   |   | (22,000    | )    
|Gain on sale of discontinued operations, net of
    taxes                 |                                                    |                               | 22,000    |       |                                 |   | 22,000    |       |   |   |            |       |   |       |            |       |         |   | 22,000    |       |   |   | 22,000    |       |   |   |            |       |   |   |            |      
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |      
|Adjusted net loss applicable to common
    stockholders                   |                                                    | $                             | (146,000  | )     |                                 | $ | (146,000  | )     |   | $ | (1,838,000 | )     |   | $     | (1,838,000 | )     |         | $ | (201,000  | )     |   | $ | (201,000  | )     |   | $ | (1,526,000 | )     |   | $ | (1,526,000 | )    
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |      
|Income (loss) per share:                                                  |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |       |   |   |            |       |   |   |            |      
|                                                                          | From continuing operations, net of taxes           |                               | $         | (0.06 | )                               |   | $         | (0.06 | ) |   | $          | (0.45 | ) |       | $          | (0.45 | )       |   | $         | (0.08 | ) |   | $         | (0.08 | ) |   | $          | (0.47 | ) |   | $          | (0.47 | )
|                                                                          | From discontinued operations, net of taxes         |                               |           |       |                                 |   |           |       |   |   |            | (0.12 | ) |       |            | (0.12 | )       |   |           |       |   |   |           |       |   |   |            | (0.01 | ) |   |            | (0.01 | )
|                                                                          | From sale of discontinued operations, net of taxes |                               |           | 0.01  |                                 |   |           | 0.01  |   |   |            |       |   |       |            |       |         |   |           | 0.01  |   |   |           | 0.01  |   |   |            |       |   |   |            |       |  
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |      
|                                                                          | Net loss per share                                 |                               | $         | (0.05 | )                               |   | $         | (0.05 | ) |   | $          | (0.57 | ) |       | $          | (0.57 | )       |   | $         | (0.07 | ) |   | $         | (0.07 | ) |   | $          | (0.48 | ) |   | $          | (0.48 | )
|                                                                          |                                                    |                               |           |       |                                 |   |           |       |   |   |            |       |   |       |            |       |         |   |           |       |   |   |           |      



|         |                  
|-------- | -----------------
|Note 9  | 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, 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.

The Company operates and reports its activities
through three principal units: MercFuel, Air Cargo and Maytag.
Air Centers was sold on April 12, 2004. As a result, Air
Centers historical operating results have been
reclassified as discontinued operations. The segment data
included below have been restated to exclude amounts related to
the Air Centers.

12



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                       |  |          |         |  |           |   |        |           |  |       |            |  |  |            |        |   |  |   |         | 
|-------------------------------------- |  | -------- | ------- |  | --------- | - | ------ | --------- |  | ----- | ---------- |  |  | ---------- | ------ | - |  | - | ------- | 
|                                       |  |          |         |  |           |   |        |           |  | Total |           
|                                       |  |          |         |  |           |   |        | Corporate |  |       | Continuing | 
|                                       |  | MercFuel |         |  | Air Cargo |   |        | Maytag    |  |       | and Other  |  |  | Operations |       
|                                       |  |          |         |  |           |   |        |           |  |       |            |  |  |            |       
|Quarter Ended December 31, 2004        |  |          |         |  |           |   |        |           |  |       |            |  |  |            |        |   |  |   |         | 
|Revenues                               |  | $        | 136,967 |  |           | $ | 11,388 |           |  | $     | 4,980      |  |  | $          | 197    |   |  | $ | 153,532 | 
|Gross margin                           |  |          | 2,551   |  |           |   | 1,433  |           |  |       | 1,218      |  |  |            | (45    | ) |  |   | 5,157   | 
|Depreciation and amortization          |  |          | 137     |  |           |   | 396    |           |  |       | 54         |  |  |            | 32     |   |  |   | 619     | 
|Capital expenditures                   |  |          | 649     |  |           |   | 7      |           |  |       |            |  |  |            | 22     |   |  |   | 678     | 
|Goodwill                               |  |          |         |  |           |   | 1,274  |           |  |       | 3,137      |  |  |            |        |   |  |   | 4,411   | 
|Segment assets                         |  |          | 48,043  |  |           |   | 15,053 |           |  |       | 8,950      |  |  |            | 22,035 |   |  |   | 94,081  | 
|Quarter Ended December 31, 2003        |  |          |         |  |           |   |        |           |  |       |            |  |  |            |        |   |  |   |         | 
|Revenues                               |  | $        | 74,901  |  |           | $ | 10,683 |           |  | $     | 5,915      |  |  |            |        |   |  | $ | 91,499  | 
|Gross margin                           |  |          | 1,874   |  |           |   | 523    |           |  |       | 1,431      |  |  |            |        |   |  |   | 3,828   | 
|Depreciation and amortization          |  |          | 119     |  |           |   | 459    |           |  |       | 79         |  |  | $          | 56     |   |  |   | 713     | 
|Capital expenditures                   |  |          | 2       |  |           |   | 26     |           |  |       | 89         |  |  |            | 12     |   |  |   | 129     | 
|Goodwill                               |  |          |         |  |           |   | 1,252  |           |  |       | 3,137      |  |  |            |        |   |  |   | 4,389   | 
|Segment assets                         |  |          | 29,788  |  |           |   | 18,979 |           |  |       | 10,489     |  |  |            | 17,896 |   |  |   | 77,152  | 
|Six Months Ended December 31,
    2004 |  |          |         |  |           |   |        |           |  |       |            |  |  |            |        |   |  |   |         | 
|Revenues                               |  | $        | 245,771 |  |           | $ | 22,578 |           |  | $     | 10,343     |  |  | $          | 331    |   |  | $ | 279,023 | 
|Gross margin                           |  |          | 4,191   |  |           |   | 2,759  |           |  |       | 2,529      |  |  |            | (31    | ) |  |   | 9,448   | 
|Depreciation and amortization          |  |          | 258     |  |           |   | 780    |           |  |       | 134        |  |  | $          | 82     |   |  |   | 1,254   | 
|Capital expenditures                   |  |          | 977     |  |           |   | 80     |           |  |       | 1          |  |  |            | 67     |   |  |   | 1,125   | 
|Goodwill                               |  |          |         |  |           |   | 1,274  |           |  |       | 3,137      |  |  |            |        |   |  |   | 4,411   | 
|Segment assets                         |  |          | 48,043  |  |           |   | 15,053 |           |  |       | 8,950      |  |  |            | 22,035 |   |  |   | 94,081  | 
|Six Months Ended December 31,
    2003 |  |          |         |  |           |   |        |           |  |       |            |  |  |            |        |   |  |   |         | 
|Revenues                               |  | $        | 139,890 |  |           | $ | 19,577 |           |  | $     | 11,742     |  |  |            |        |   |  | $ | 171,209 | 
|Gross margin                           |  |          | 3,300   |  |           |   | 1,296  |           |  |       | 2,743      |  |  |            |        |   |  |   | 7,339   | 
|Depreciation and amortization          |  |          | 234     |  |           |   | 917    |           |  |       | 160        |  |  | $          | 115    |   |  |   | 1,426   | 
|Capital expenditures                   |  |          | 639     |  |           |   | 38     |           |  |       | 106        |  |  |            | 21     |   |  |   | 804     | 
|Goodwill                               |  |          |         |  |           |   | 1,252  |           |  |       | 3,137      |  |  |            |        |   |  |   | 4,389   | 
|Segment assets                         |  |          | 29,788  |  |           |   | 18,979 |           |  |       | 10,489     |  |  |            | 17,896 |   |  |   | 77,152  | 

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
MercFuel. Bad debt expense (benefit) for MercFuel was
approximately $151,000 and ($519,000) for the quarters ended
December 31, 2004 and 2003, respectively; total bad debt
expense (benefit) was $87,000 and ($384,000) in the quarters
ended December 31, 2004 and 2003, respectively. Bad debt
expense (benefit) for MercFuel was approximately $300,000 and
($180,000) for the six month periods ended December 31,
2004 and 2003, respectively; total bad debt expense (benefit)
was $364,000 and ($24,000) for the six month periods ended
December 31, 2004 and 2003, respectively.

13



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|          |                            
|--------- | ---------------------------
|Note 10  | Comprehensive Income (Loss)

Comprehensive income (loss) is summarized as
follows:

|                                        |  |                  |          |   |                    |   |            |      |  |   |          |   |  |   |            |  
|--------------------------------------- |  | ---------------- | -------- | - | ------------------ | - | ---------- | ---- |  | - | -------- | - |  | - | ---------- | -
|                                        |  |                  |          |  
|                                        |  | Six Months Ended |          |   | Three Months Ended |  
|                                        |  | December 31,     |          |   | December 31,       |  
|                                        |  |                  |          |   |                    |  
|                                        |  | 2004             |          |   | 2003               |   |            | 2004 |  |   | 2003     |  
|                                        |  |                  |          |   |                    |   |            |      |  |   |          |  
|Net loss                                |  | $                | (126,000 | ) |                    | $ | (1,819,000 | )    |  | $ | (190,000 | ) |  | $ | (1,517,000 | )
|Foreign currency translation adjustment |  |                  | 239,000  |   |                    |   | 148,000    |      |  |   | 125,000  |   |  |   | 140,000    |  
|                                        |  |                  |          |   |                    |   |            |      |  |   |          |  
|Comprehensive income (loss)             |  | $                | 113,000  |   |                    | $ | (1,671,000 | )    |  | $ | (65,000  | ) |  | $ | (1,377,000 | )
|                                        |  |                  |          |   |                    |   |            |      |  |   |          |  



|          |                           
|--------- | --------------------------
|Note 11  | Related Party Transactions

CFK Partners was a partnership consisting of
three of the Companys directors, one of whom also serves
as the Companys Chief Executive Officer, another who
served as Chairman of the Board of Directors and the third who
serves as a director and is the Companys primary outside
legal counsel. In July 2004, after the retirement of
Dr. Fagan as the Companys Chairman of the Board of
Directors, Dr. Fagan withdrew as a member of CFK Partners.
The remaining members of CFK Partners, now known as CK Partners,
are the Companys Chief Executive Officer and Frederick H.
Kopko, Jr., a member of the Companys Board of
Directors. As of December 31, 2004, CK Partners owned
approximately 43% of the Companys outstanding common stock.

Pursuant to the terms of Dr. Fagans
contract with the Company, upon Dr. Fagans retirement
as Chairman of the Board of Directors in July 2004, the Company
paid Dr. Fagan a bonus and severance payment of $1,890
thousand. This amount was accrued at June 30, 2004.

In January 2002, the Company sold the land and
office building which houses its corporate headquarters to CFK
Realty Partners, LLC (CFK Realty) for $4,200
thousand, consisting of $2,800 thousand in cash and a note
receivable of $1,400 thousand. The note accrued interest at 5%
and contained provisions whereby CFK Realty could elect to
extend the maturity date in one-year increments through
December 31, 2004. The note had an original maturity date
of December 31, 2002. In early December 2002 and 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 twenty-year lease of the property
for a monthly rental amount of approximately $37 thousand.
During fiscal 2003, the Company expended $275 thousand for
leasehold improvements on its corporate headquarters. This
amount is being amortized over the office lease term. CFK Realty
financed the purchase of the headquarters through a $3,200
thousand loan. In July 2004, CFK Realty was restructured whereby
Dr. Fagan, the retired Chairman of the Companys Board
of Directors, became the sole member of CFK Realty. Effective
July 2004, CFK Realty is no longer considered a related party
and the financial statements of CFK Realty are no longer
included in the Companys consolidated financial statements.

On November 10, 2004, the Company, upon
authorization from the Companys Board of Directors,
entered into an amended lease agreement with CFK Realty and
amended the terms of the note receivable due from CFK Realty
(the CFK Realty Note). The amended terms of the
lease, which were effective retroactively to July 1, 2004,
provide for a ten-year lease with CFK Realty having the right,
after the refinancing of its existing loan secured by the office
building, to request the Company to vacate the facility at the
end of five years without any additional obligation from the
Company with CFK Realty continuing to honor the terms of any
sublease the Company may have arranged under the McConnell
Lease. The monthly lease rate remains unchanged from the
original lease at $37 thousand. The Company also agreed to amend
the terms of the CFK Realty Note to reduce the principal amount
of the note to $779 thousand, from the previous

14



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

principal amount of $1,400 thousand plus accrued
interest of $179 thousand, at an interest rate of 4% per
annum. The CFK Realty Note is payable on December 31, 2009.

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 member of CK Partners. For the six month
periods ended December 31, 2004 and 2003, the Company paid
the Firm $474 thousand and $481 thousand, respectively, for
legal services rendered by the Firm. For the three month periods
ended December 31, 2004 and 2003, the Company paid the Firm
$234 thousand and $339 thousand, respectively, for legal
services rendered by the Firm.



|          |                        
|--------- | -----------------------
|Note 12  | Discontinued Operations

On April 12, 2004, after receiving approval
from the Companys stockholders at the Annual
Stockholders meeting, the Company sold all of the
outstanding common stock of Air Centers to Allied with the
Company receiving total consideration for the sale in cash at
closing of $76,349 thousand subject to adjustments for, among
other things, Air Centers net working capital as of the
FBO Sale Closing Date and the distribution of funds from the
Hartsfield Escrow Account.

On December 6, 2004, the Company, Allied and
Air Centers agreed that Air Centers Closing Working
Capital as of April 12, 2004 as defined in the Stock
Purchase Agreement dated as of October 28, 2003 by and
among the Company, Allied and MAC, as amended, (the
SPA) was $5,307 thousand. The SPA provided that:
1) Allied would pay the Company the amount by which the
closing working capital exceeded $3,586 thousand (the
Working Capital Target), or 2) the Company
would pay Allied the amount by which the Working Capital Target
exceeded the Closing Working Capital. The Company received $900
thousand in July 2004 from Allied as an initial payment of the
amount expected to be due the Company as a result of the Closing
Working Capital exceeding the Working Capital Target and $738
thousand on December 6, 2004 as a final payment, which
includes accrued interest of $48 thousand and is net of $132
thousand due Allied for reimbursement of certain regulatory
compliance improvements as provided for in the SPA.

In addition to the final payment associated with
the Closing Working Capital, Allied and Air Centers agreed to
assign to the Company all of Air Centers rights, title and
interest to Air Centers pre-petition claims associated
with Hawaiian Airlines in the amount of $329 thousand. Hawaiian
Airlines, a customer of both the Company and Air Centers, filed
for bankruptcy protection under Chapter 11, Title 11
of the United States Bankruptcy Code on March 21, 2003.

The Company reported a gain on the sale of
discontinued operations, net of income tax provision of
$14 thousand, of $22 thousand in the second quarter of
fiscal 2005.

The following are the results of operations of
Air Centers for the six month and three month periods ended
December 31, 2003:

|                               |  |                   |            |   |                    |   |            |  
|------------------------------ |  | ----------------- | ---------- | - | ------------------ | - | ---------- | -
|                               |  | Six Months Ended  |            |   | Three Months Ended |  
|                               |  |                   |            |   |                    |  
|                               |  |                  
|                               |  | December 31, 2003 |           
|                               |  |                   |           
|Total sales and revenue        |  | $                 | 45,983,000 |   |                    | $ | 23,450,000 |  
|Gross margin                   |  | $                 | 6,288,000  |   |                    | $ | 3,084,000  |  
|Loss before income tax benefit |  | $                 | (643,000   | ) |                    | $ | (36,000    | )
|Income tax expense (benefit)   |  |                   | (251,000   | ) |                    | $ | (14,000    | )
|                               |  |                   |            |   |                    |  
|Net loss                       |  | $                 | (392,000   | ) |                    | $ | (22,000    | )
|                               |  |                   |            |   |                    |  

15



---



##### 



MERCURY AIR GROUP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|          |              
|--------- | -------------
|Note 13  | Cash Dividend

On October 6, 2004, the Company announced
that its Board of Directors declared a one-time special cash
dividend totaling $17,500 thousand, that would be payable on a
pro rata basis to holders of record of its common stock as of
the close of business on October 18, 2004. The dividend was
paid on November 5, 2004. Based on 3,056,355 shares of
its common stock outstanding as of the close of business on
October 18, 2004, the dividend payable per common share was
$5.70. The amount payable per share of common stock was net of
the mandatory dividend payments of approximately $70 thousand on
the Companys outstanding Series A 8% Cumulative
Convertible Preferred Stock (the Preferred Stock) as
of the dividend payment date of November 5, 2004. This
one-time special cash dividend was funded, in part, by a cash
advance on the B of A Credit Facility in the amount of $10,000
thousand.



|          |                  
|--------- | -----------------
|Note 14  | Subsequent Events

None


16



---



##### 








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

Overview  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 three principal operating units which are all
wholly owned subsidiaries of the Company: MercFuel, Inc.
(MercFuel), a Delaware corporation, Mercury Air
Cargo, Inc. (Air Cargo), a California corporation,
and Maytag Aircraft Corporation (Maytag), a Colorado
corporation. MercFuels operations consist of the sale and
delivery of fuel, primarily aviation fuel, to domestic and
international commercial airlines, fractional jet ownership
companies, corporate aviation fleets and air cargo companies.
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. Maytag
is a provider of governmental contract services performing
aircraft refueling and fuel storage operations, base operations
support (BOS) services, air terminal and ground
handling services and weather observation and forecasting
services primarily for agencies of the government of the United
States of America.

As used in this Quarterly Report on
Form 10-Q, the term Company or
Mercury refers to Mercury Air Group, Inc. and,
unless the context otherwise requires, its subsidiaries. The
Companys principal executive offices are located at 5456
McConnell Avenue, Los Angeles, California, 90066 and its
telephone number is (310) 827-2737.

Government Regulation  The Company is
subject to the regulatory and reporting requirements of the
Sarbanes-Oxley Act of 2002. Management believes it is in
material compliance with the provisions of this Act at this
time. Management does anticipate, however, that current and
future compliance with such provisions, including the
Section 404 certification of internal controls by
management and attestation by the Companys independent
auditors, will result in significant increases in consulting,
audit and legal fees and overhead expenses related to software,
documentation, testing, remediation, system enhancements, hiring
new personnel and administrative time. The total cost of the
Companys compliance with the requirements of the
Sarbanes-Oxley Act is uncertain, although the most costly
provisions will be related to the Companys first
Section 404 compliance year ending June 30, 2006.
However, management estimates such compliance costs could exceed
$2.5 million during the eighteen months leading up to
June 30, 2006. Management further believes that
significant, additional costs will be incurred for each
succeeding year thereafter. Such compliance cost estimates are
incremental to current general and administrative expenses and
do not include the opportunity costs associated with the time
and effort of current employees and management, which is
expected to be significant.

Results of Operations  Comparison of
the three month periods ended December 31, 2004 and
December 31, 2003 and comparison of the six month periods
ended December 31, 2004 and December 31, 2003

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

|               |  |                               |         |            |                                 |  |       |        |            |   |          |  |  |            |       |   |          |   |            |        |  |  |          |   |  |   |        |  |  |  |       |  
|-------------- |  | ----------------------------- | ------- | ---------- | ------------------------------- |  | ----- | ------ | ---------- | - | -------- |  |  | ---------- | ----- | - | -------- | - | ---------- | ------ |  |  | -------- | - |  | - | ------ |  |  |  | ----- | -
|               |  |                               |         |           
|               |  | Six Months Ended December 31, |         |            | Three Months Ended December 31, | 
|               |  |                               |         |            |                                 | 
|               |  |                               |         |            |                                 |  |       |       
|               |  | 2004                          |         |            | 2003                            |  |       | 2004   |            |   | 2003     | 
|               |  |                               |         |            |                                 |  |       |        |            |   |          | 
|               |  |                               |         | % of Total |                                 |  |       |        | % of Total |   |          |  |  | % of Total |       |   |          |   | % of Total |       
|               |  | Amount                        |         |            | Revenues                        |  |       | Amount |            |   | Revenues |  |  | Amount     |       |   | Revenues |   |            | Amount |  |  | Revenues |  
|               |  |                               |         |            |                                 |  |       |        |            |   |          |  |  |            |       |   |          |   |            |        |  |  |          |  
|               |  |                              
|               |  | ($ in thousands)              |        
|Revenues:      |  |                               |         |            |                                 |  |       |        |            |   |          |  |  |            |       |   |          |   |            |        |  |  |          |   |  |   |        |  |  |  |       |  
|MercFuel       |  | $                             | 245,771 |            |                                 |  | 88.1  | %      |            | $ | 139,890  |  |  |            | 81.7  | % |          | $ | 136,967    |        |  |  | 89.2     | % |  | $ | 74,901 |  |  |  | 81.8  | %
|Air Cargo      |  |                               | 22,578  |            |                                 |  | 8.1   |        |            |   | 19,577   |  |  |            | 11.4  |   |          |   | 11,388     |        |  |  | 7.4      |   |  |   | 10,683 |  |  |  | 11.7  |  
|Maytag         |  |                               | 10,343  |            |                                 |  | 3.7   |        |            |   | 11,742   |  |  |            | 6.9   |   |          |   | 4,980      |        |  |  | 3.3      |   |  |   | 5,915  |  |  |  | 6.5   |  
|Other          |  |                               | 331     |            |                                 |  | 0.1   |        |            |   |          |  |  |            |       |   |          |   | 197        |        |  |  | 0.1      |   |  |   |        |  |  |  |       |  
|               |  |                               |         |            |                                 |  |       |        |            |   |          |  |  |            |       |   |          |   |            |        |  |  |          |  
|Total revenues |  | $                             | 279,023 |            |                                 |  | 100.0 | %      |            | $ | 171,209  |  |  |            | 100.0 | % |          | $ | 153,532    |        |  |  | 100.0    | % |  | $ | 91,499 |  |  |  | 100.0 | %
|               |  |                               |         |            |                                 |  |       |        |            |   |          |  |  |            |       |   |          |   |            |        |  |  |          |  

17



---



##### 



|                 |  |        |       |           |          |  |      |        |           |   |          |  |  |           |      |   |          |   |           |        |  |  |          |   |  |   |       |  |  |  |      |  
|---------------- |  | ------ | ----- | --------- | -------- |  | ---- | ------ | --------- | - | -------- |  |  | --------- | ---- | - | -------- | - | --------- | ------ |  |  | -------- | - |  | - | ----- |  |  |  | ---- | -
|                 |  |        |       | % of Unit |          |  |      |        | % of Unit |   |          |  |  | % of Unit |      |   |          |   | % of Unit |       
|                 |  | Amount |       |           | Revenues |  |      | Amount |           |   | Revenues |  |  | Amount    |      |   | Revenues |   |           | Amount |  |  | Revenues |  
|                 |  |        |       |           |          |  |      |        |           |   |          |  |  |           |      |   |          |   |           |        |  |  |          |  
|Gross margin(1): |  |        |       |           |          |  |      |        |           |   |          |  |  |           |      |   |          |   |           |        |  |  |          |   |  |   |       |  |  |  |      |  
|MercFuel         |  | $      | 4,191 |           |          |  | 1.7  | %      |           | $ | 3,300    |  |  |           | 2.4  | % |          | $ | 2,551     |        |  |  | 1.9      | % |  | $ | 1,874 |  |  |  | 2.5  | %
|Air Cargo        |  |        | 2,759 |           |          |  | 12.2 |        |           |   | 1,296    |  |  |           | 6.6  |   |          |   | 1,433     |        |  |  | 12.6     |   |  |   | 523   |  |  |  | 4.9  |  
|Maytag           |  |        | 2,529 |           |          |  | 24.5 |        |           |   | 2,743    |  |  |           | 23.4 |   |          |   | 1,218     |        |  |  | 24.5     |   |  |   | 1,431 |  |  |  | 24.2 |  
|Other            |  |        | (31   | )         |          |  | (9.4 | )      |           |   |          |  |  |           |      |   |          |   | (45       | )      |  |  | (23.1    | ) |  |   |       |  |  |  |      |  
|                 |  |        |       |           |          |  |      |        |           |   |          |  |  |           |      |   |          |   |           |        |  |  |          |  
|Total revenues   |  | $      | 9,448 |           |          |  | 3.4  | %      |           | $ | 7,339    |  |  |           | 4.3  | % |          | $ | 5,157     |        |  |  | 3.4      | % |  | $ | 3,828 |  |  |  | 4.2  | %
|                 |  |        |       |           |          |  |      |        |           |   |          |  |  |           |      |   |          |   |           |        |  |  |          |  

|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |    |  |   |        |   |  |  |      |   
|----------------------------------------------------------------------------------- |  | ----------------------------- | ----- | ---------- | ------------------------------- |  | ---- | ------ | ---------- | - | -------- | - |  | ---------- | ---- | -- | -------- | - | ---------- | ------ |  |  | -------- | -- |  | - | ------ | - |  |  | ---- | --
|                                                                                    |  |                               |       |           
|                                                                                    |  | Six Months Ended December 31, |       |            | Three Months Ended December 31, | 
|                                                                                    |  |                               |       |            |                                 | 
|                                                                                    |  |                               |       |            |                                 |  |      |       
|                                                                                    |  | 2004                          |       |            | 2003                            |  |      | 2004   |            |   | 2003     |  
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |  
|                                                                                    |  |                               |       | % of Total |                                 |  |      |        | % of Total |   |          |   |  | % of Total |      |    |          |   | % of Total |       
|                                                                                    |  | Amount                        |       |            | Revenues                        |  |      | Amount |            |   | Revenues |   |  | Amount     |      |    | Revenues |   |            | Amount |  |  | Revenues |   
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Expenses (Income):                                                                  |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |    |  |   |        |   |  |  |      |   
|Selling, general and administrative expenses                                        |  | $                             | 7,028 |            |                                 |  | 2.5  | %      |            | $ | 5,044    |   |  |            | 3.0  | %  |          | $ | 4,317      |        |  |  | 2.8      | %  |  | $ | 2,763  |   |  |  | 3.0  | % 
|Provision (recovery) for bad debts                                                  |  |                               | 364   |            |                                 |  | 0.1  |        |            |   | (24      | ) |  |            |      |    |          |   | 87         |        |  |  | 0.1      |    |  |   | (384   | ) |  |  | (0.4 | ) 
|Depreciation and amortization                                                       |  |                               | 1,254 |            |                                 |  | 0.5  |        |            |   | 1,426    |   |  |            | 0.8  |    |          |   | 619        |        |  |  | 0.4      |    |  |   | 713    |   |  |  | 0.8  |   
|Interest expense and other                                                          |  |                               | 530   |            |                                 |  | 0.2  |        |            |   | 286      |   |  |            | 0.2  |    |          |   | 426        |        |  |  | 0.3      |    |  |   | 235    |   |  |  | 0.2  |   
|Hambro settlement costs                                                             |  |                               |       |            |                                 |  |      |        |            |   | 1,799    |   |  |            | 1.0  |    |          |   |            |        |  |  |          |    |  |   | 1,799  |   |  |  | 2.0  |   
|Asset impairment loss                                                               |  |                               | 626   |            |                                 |  | 0.2  |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |    |  |   |        |   |  |  |      |   
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Total expenses (income)                                                             |  |                               | 9,802 |            |                                 |  | 3.5  |        |            |   | 8,531    |   |  |            | 5.0  |    |          |   | 5,449      |        |  |  | 3.6      |    |  |   | 5,126  |   |  |  | 5.6  |   
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Loss from continuing operations before minority
    interest and income tax expense |  |                               | (354  | )          |                                 |  | (0.1 | )      |            |   | (1,192   | ) |  |            | (0.7 | )  |          |   | (292       | )      |  |  | (0.2     | )  |  |   | (1,298 | ) |  |  | (1.4 | ) 
|Minority interest                                                                   |  |                               | 181   |            |                                 |  | 0.1  |        |            |   | 4        |   |  |            |      |    |          |   |            |        |  |  |          |    |  |   | (2     | ) |  |  |      |   
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Loss from continuing operations before income tax
    expense                       |  |                               | (173  | )          |                                 |  | (0.1 | )      |            |   | (1,188   | ) |  |            | (0.7 | )  |          |   | (292       | )      |  |  | (0.2     | )  |  |   | (1,300 | ) |  |  | (1.4 | ) 
|Income tax benefit                                                                  |  |                               | (25   | )          |                                 |  | 0.0  |        |            |   | 239      |   |  |            | (0.1 | )  |          |   | (80        | )      |  |  | 0.1      |    |  |   | 195    |   |  |  | (0.2 | ) 
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Loss from continuing operations, net of taxes                                       |  |                               | (148  | )          |                                 |  | (0.1 | )      |            |   | (1,427   | ) |  |            | (0.9 | )  |          |   | (212       | )      |  |  | (0.1     | )  |  |   | (1,495 | ) |  |  | (1.7 | ) 
|Loss from discontinued operations, net of taxes                                     |  |                               |       |            |                                 |  |      |        |            |   | (392     | ) |  |            | (0.2 | )  |          |   |            |        |  |  |          |    |  |   | (22    | ) |  |  |      |   
|Gain on sale of discontinued operations, net of
    taxes                           |  |                               | 22    |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   | 22         |        |  |  |          |    |  |   |        |   |  |  |      |   
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   
|Net income (loss)                                                                   |  | $                             | (126  | )          |                                 |  | (0.1 | )%     |            | $ | (1,819   | ) |  |            | (1.1 | )% |          | $ | (190       | )      |  |  | (0.1     | )% |  | $ | (1,517 | ) |  |  | (1.7 | )%
|                                                                                    |  |                               |       |            |                                 |  |      |        |            |   |          |   |  |            |      |    |          |   |            |        |  |  |          |   



---



|    |                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 expenses.

Three Months Ended December 31, 2004
Compared to December 31, 2003

The Company reported a net loss from continuing
operations of $212 thousand or $0.08 per basic and diluted
share in the second quarter of fiscal 2005, as compared to a
loss from continuing operations, net of taxes, reported for the
same period last year of $1,495 thousand, or $0.47 per
basic and diluted share. For the

18



---



##### 



second quarter of fiscal 2005, the Company
reported a net loss of $190 thousand, or $0.07 per basic
and diluted share, which included a gain on sale of discontinued
operations, net of taxes, of $22 thousand, or $0.01 per
basic and diluted share. For the second quarter of fiscal 2004,
the Company reported a net loss of $1,517 thousand, or
$0.48 per basic and diluted share, which included a loss
from discontinued operations, net of taxes, of $22 thousand, or
$0.01 per basic and diluted share. Revenue from continuing
operations for the Company in the second quarter of fiscal 2005
was $153,532 thousand, which increased by $62,033 thousand or
67.8% from revenue from continuing operations of $91,499
thousand reported for the second quarter of fiscal 2004. Gross
margin from continuing operations increased by $1,329 thousand
or 34.7% to $5,157 thousand in the second quarter of fiscal 2005
from $3,828 thousand reported in the second quarter of fiscal
2004.


MercFuel, the Companys aviation fuel sales
business, generated revenue of $136,967 thousand in the second
quarter of fiscal 2005 on sales volume of 82,150 thousand
gallons, as compared to revenue of $74,901 thousand on sales
volume of 70,844 thousand gallons in the second quarter of
fiscal 2004. Following is a comparison of MercFuels sales
information for the second quarter of fiscal 2005 and 2004,
respectively:

|                                   |                           |                    |   |         |      |  |   |        | 
|---------------------------------- | ------------------------- | ------------------ | - | ------- | ---- |  | - | ------ | 
|                                   |                           |                   
|                                   |                           | Three Months Ended |  
|                                   |                           | December 31,       |  
|                                   |                           |                    |  
|                                   |                           | 2004               |   |         | 2003 | 
|                                   |                           |                    |   |         |      | 
|Commercial Sales                   |                           |                    |   |         |      |  |   |       
|                                   | Revenue ($000)            |                    | $ | 104,854 |      |  | $ | 60,161 | 
|                                   | Volume (thousand gallons) |                    |   | 68,736  |      |  |   | 62,047 | 
|Corporate Aviation/ Fractional Jet |                           |                    |   |         |      |  |   |       
|                                   | Revenue ($000)            |                    | $ | 32,113  |      |  | $ | 14,740 | 
|                                   | Volume (thousand gallons) |                    |   | 13,414  |      |  |   | 8,797  | 
|MercFuel Total                     |                           |                    |   |         |      |  |   |       
|                                   | Revenue ($000)            |                    | $ | 136,967 |      |  | $ | 74,901 | 
|                                   | Volume (thousand gallons) |                    |   | 82,150  |      |  |   | 70,844 | 
|                                   | Gross margin ($000)       |                    | $ | 2,551   |      |  | $ | 1,874  | 

Revenue for MercFuels commercial segment
increased $44,693 thousand in the second quarter of fiscal 2005
to $104,854 thousand on sales volume of 68,736 thousand gallons.
The increased revenue for the commercial segment is due to
higher average petroleum product prices resulting from concerns
of oil supply disruptions due to general tension in the Middle
East, from production control by OPEC and from increased
worldwide demand for petroleum products due to an improving
worldwide economy. MercFuels commercial segments
average sales price in the second quarter of fiscal 2005
increased 57.3% over the second quarter of fiscal 2004s
average sales price. The increased average sales price in the
second quarter of fiscal 2005, as compared to the second quarter
of fiscal 2004, represents increased revenue of approximately
$38,207 thousand. MercFuels commercial sales volume
increased in the second quarter of fiscal 2005 to 68,736
thousand gallons, an increase of 6,689 thousand gallons, or
10.8%, from MercFuels second quarter of fiscal 2004s
commercial sales volume of 62,047 thousand gallons. The
increased sales volume in the second quarter of fiscal 2005, as
compared to the second quarter of fiscal 2004, represents
increased revenue of approximately $6,486 thousand.

Revenue for MercFuels corporate/fractional
jet ownership segment was $32,113 thousand on sales volume of
13,414 thousand gallons in the second quarter of fiscal 2005, an
increase of $17,373 thousand, or 117.9%, and 4,617 thousand
gallons, or 52.5%, from the second quarter of fiscal 2004s
revenue of $14,740 thousand on sales volume of 8,797 thousand
gallons. The increase in sales revenue is due to the increase in
worldwide petroleum product prices, increased use of private
aircraft for both business and personal travel and
MercFuels strategic focus on this business segment. The
average sales price for aviation jet fuel in the
corporate/fractional jet ownership segment in the second quarter
of fiscal 2005 increased 42.9% as compared to the second quarter
of fiscal 2004 equating to increased revenue of approximately
$9,637 thousand. The increased sales volume equates to an
increase in revenue of approximately $7,736 thousand.

19



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##### 



MercFuels cost of aviation fuel was
$133,189 thousand in the second quarter of fiscal 2005 which
represents an increase of 85.4% from MercFuels cost of
aviation fuel in the second quarter of fiscal 2004 of $71,851
thousand. The average cost of aviation fuel per gallon increased
59.9% in the second quarter of fiscal 2005 to $1.621 per
gallon. The increase in the average cost of aviation fuel per
gallon equates to an increase in the cost of aviation fuel of
$49,871 thousand. The increase in the volume of aviation fuel
purchased resulted in an increase in the cost of aviation fuel
of $11,467 thousand. MercFuels operating expenses,
excluding the cost of aviation fuel, were $1,227 thousand in the
second quarter of fiscal 2005, an increase of $51 thousand from
the second quarter of fiscal 2004s operating expense
excluding aviation fuel cost of $1,176 thousand.

Air Cargos revenue was $11,388 thousand in
the second quarter of fiscal 2005, an increase of $705 thousand,
or 6.6%, from the second quarter of fiscal 2004 revenue of
$10,683 thousand resulting in gross margin of $1,433 thousand in
the second quarter of fiscal 2005, an increase of $910 thousand
from last years gross margin of $523 thousand.

|                    |                                    |                    |   |       |        |  |   |       |        | 
|------------------- | ---------------------------------- | ------------------ | - | ----- | ------ |  | - | ----- | ------ | 
|                    |                                    |                   
|                    |                                    | Three Months Ended |  
|                    |                                    | December 31,       |  
|                    |                                    |                    |  
|                    |                                    | 2004               |   |       | 2003   | 
|                    |                                    |                    |   |       |        | 
|Revenue ($000)      |                                    |                    |   |       |        |  |   |      
|                    | Cargo handling                     |                    | $ | 7,675 |        |  | $ | 6,669 |       
|                    | Cargo logistics services           |                    |   | 2,448 |        |  |   | 2,821 |       
|                    | Cargo general sales agent services |                    |   | 1,265 |        |  |   | 1,193 |       
|                    |                                    |                    |   |       |        | 
|                    |                                    | Air Cargo total    |   | $     | 11,388 |  |   | $     | 10,683 | 
|Gross margin ($000) |                                    |                    |   |       |        |  |   |      
|                    | Cargo handling                     |                    | $ | 1,118 |        |  | $ | 694   |       
|                    | Cargo logistics services           |                    |   | 669   |        |  |   | 517   |       
|                    | Cargo general sales agent services |                    |   | 45    |        |  |   | (67   | )     
|                    | Cargo administrative               |                    |   | (399  | )      |  |   | (621  | )     
|                    |                                    |                    |   |       |        | 
|                    |                                    | Air Cargo total    |   | $     | 1,433  |  |   | $     | 523    | 

The cargo handling segment reported revenue of
$7,675 thousand in the second quarter of fiscal 2005, an
increase of $1,006 thousand, or 15.1%, from the second quarter
of fiscal 2004 revenue of $6,669 thousand. Cargo handlings
gross margin in the second quarter of fiscal 2005 was $1,118
thousand, an increase of $424 thousand, or 61.1%, from the
second quarter of fiscal 2004 gross margin of $694 thousand. The
improved results are mainly due to increased cargo handling
volume as a result of an improved worldwide economy and Air
Cargos focus on cost control.

The cargo logistics services segment reported
revenue of $2,448 thousand in the second quarter of fiscal 2005,
a decrease of $373 thousand from the second quarter of fiscal
2004 revenue of $2,821 thousand. The decreased revenue in the
second quarter of fiscal 2005 is mainly due to decreased
business activity associated with Air Cargos Mercury World
Cargo (MWC) operation. Cargo logistics services
segments gross margin in the second quarter of fiscal 2005
increased $152 thousand from the second quarter of fiscal 2004
to $669 thousand. The increased gross margin is due to the
increased business activity associated with various airline
management contracts.

The cargo general sales agent (GSA) services
segment reported revenue of $1,265 thousand in the second
quarter of fiscal 2005, an increase of $72 thousand from the
second quarter of fiscal 2004 revenue of $1,193 thousand. The
GSA services gross margin in the second quarter of fiscal
2005 was $45 thousand, an increase of $112 thousand from the
second quarter of fiscal 2004 loss of $67 thousand. The increase
in GSAs gross margin is due to Air Cargos focus on
cost control.

Air Cargos administrative expenses in the
second quarter of fiscal 2005 were $399 thousand, a decrease of
$222 thousand from the second quarter of fiscal 2004 expenses of
$621 thousand, which included $280 thousand in severance costs.

20



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##### 



Maytag reported revenue of $4,980 thousand in the
second quarter of fiscal 2005, a reduction of $935 thousand from
the second quarter of fiscal 2004 revenue of $5,915 thousand.
Maytags second quarter of fiscal 2005 gross margin was
$1,218 thousand, a decrease of $213 thousand from the second
quarter of fiscal 2004 gross margin of $1,431 thousand.

|               |              |                    |   |       |       |  |   |       |       | 
|-------------- | ------------ | ------------------ | - | ----- | ----- |  | - | ----- | ----- | 
|               |              |                   
|               |              | Three Months Ended |  
|               |              | December 31,       |  
|               |              |                    |  
|               |              | 2004               |   |       | 2003  | 
|               |              |                    |   |       |       | 
|Revenue ($000) |              |                    |   |       |       |  |   |      
|               | Refueling    |                    | $ | 1,569 |       |  | $ | 2,148 |      
|               | Air Terminal |                    |   | 1,918 |       |  |   | 1,891 |      
|               | BOS          |                    |   | 1,193 |       |  |   | 1,585 |      
|               | Weather Data |                    |   | 294   |       |  |   | 281   |      
|               | Other        |                    |   | 6     |       |  |   | 10    |      
|               |              |                    |   |       |       | 
|               |              | Total Maytag       |   | $     | 4,980 |  |   | $     | 5,915 | 

The decrease in Maytags revenue is due to
the non-renewal of one refueling contract in the first quarter
of fiscal 2005 and the non-renewal of one refueling contract and
one BOS contract during fiscal 2004. The decrease of
Maytags gross margin in the second quarter of fiscal 2005
as compared to the second quarter of fiscal 2004 is due to a
retroactive wage increase on a government BOS sub-contract in
the second quarter of fiscal 2004 and the non-renewal of
contracts.

Bad debt expense for continuing operations in the
second quarter of fiscal 2005 totaled $87 thousand, as compared
to a benefit of $384 thousand in the second quarter of fiscal
2004 as a result of the reversal of previously established bad
debt reserves due to better than expected customer collections
experience. The Company experienced no significant individual
write-offs during the second quarter of fiscal 2005.

Selling, general and administrative
(G&A) expenses in the second quarter of fiscal
2005 amounted to $4,317 thousand, an increase of $1,554 thousand
or 56.2% from the second quarter of fiscal 2004 expenses of
$2,763 thousand. The increase in G&A expenses is mainly due
to increased legal expenses from outside independent legal
counsel in connection with certain litigation and severance
costs. The Company expects that certain G&A expenses will
significantly increase in fiscal 2005 as compared to fiscal 2004
as the Company incurs increased legal fees associated with the
Signature lawsuit and due to the newly effective internal
control and other requirements of the Sarbanes-Oxley Act of
2002. See Government Regulations above.

Depreciation and amortization expense from
continuing operations was $619 thousand in the current period as
compared to $713 thousand last year.

Interest and other expense from continuing
operations in the current period was $426 thousand, an increase
of $191 thousand from last years interest and other
expense from continuing operations of $235 thousand. The
increase in interest and other expense is mainly due to the
recording of the loss on disposal of assets of $114 thousand in
the second quarter of fiscal 2005.

The Company recognized settlement expense related
to J.O. Hambro of $1,799 thousand in the second quarter of
fiscal 2004. See Exhibit 10.34 of this Form  10-Q.

The effective income tax rate in the second
quarter of fiscal year 2005 was 27.6% compared to 13.5% in the
same period last year. The J.O. Hambro settlement cost of $1,799
thousand recognized by the Company in the second quarter of
fiscal 2004 is not deductible in determining taxable income
resulting in a permanent book to tax difference.

The reduction in retained earnings from fiscal
year ending June 30, 2004 was primarily due to payment of
the $17,500 thousand dividend on November 5, 2004. See
Note 13.

The Company may experience decreases in future
sales volume and margins as a result of deterioration in the
world economy, or in the aviation industry, and continued
conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist
activities and possible military retaliation.

21



---



##### 



Through the Companys second quarter of
fiscal 2005, petroleum product prices, including aviation fuel,
have either achieved or been close to historical high levels.
This sustained price level places additional financial burden on
many of the Companys customers. If the Companys
customers are not able to pass on the higher petroleum product
prices to its customers, they may experience financial hardship
which may result in the Company experiencing longer collection
terms, which will place additional financial burden on the
Company, or higher level of uncollectible accounts.


Six Months Ended December 31, 2004
Compared to December 31, 2003

The Company reported a net loss from continuing
operations of $148 thousand or $0.06 per basic and diluted
share in the first six months of fiscal 2005, as compared to a
net loss from continuing operations, reported for the same
period last year of $1,427 thousand, or $0.45 per basic and
diluted share. For the first six months of fiscal 2005, the
Company reported a net loss of $126 thousand, or $0.05 per
basic and diluted share, which included a gain on sale of
discontinued operations, net of taxes, of $22 thousand, or
$0.01 per basic and diluted share. For the first six months
of fiscal 2004, the Company reported a net loss of $1,819
thousand, or $0.57 per basic and diluted share, which
included a loss from discontinued operations, net of taxes, of
$392 thousand, or $0.12 per basic and diluted share.
Revenue from continuing operations for the Company in the first
six months of fiscal 2005 was $279,023 thousand, which increased
by $107,814 thousand or 63% from revenue from continuing
operations of $171,209 thousand reported for the first six
months of fiscal 2004. Gross margin from continuing operations
increased by $2,109 thousand or 28.7% to $9,448 thousand in the
first six months of fiscal 2005 from $7,339 thousand reported in
the first six months of fiscal 2004.

MercFuel, the Companys aviation fuel sales
business, generated revenue of $245,771 thousand in the first
six months of fiscal 2005 on sales volume of 156,579 thousand
gallons, as compared to revenue of $139,890 thousand on sales
volume of 135,114 thousand gallons in the first six months of
fiscal 2004. Following is a comparison of MercFuels sales
information for the first six months of fiscal 2005 and 2004,
respectively:

|                                   |                           |                  |   |         |      |  |   |         | 
|---------------------------------- | ------------------------- | ---------------- | - | ------- | ---- |  | - | ------- | 
|                                   |                           |                 
|                                   |                           | Six Months Ended |  
|                                   |                           | December 31,     |  
|                                   |                           |                  |  
|                                   |                           | 2004             |   |         | 2003 | 
|                                   |                           |                  |   |         |      | 
|Commercial Sales                   |                           |                  |   |         |      |  |   |        
|                                   | Revenue ($000)            |                  | $ | 190,578 |      |  | $ | 112,556 | 
|                                   | Volume (thousand gallons) |                  |   | 132,352 |      |  |   | 118,328 | 
|Corporate Aviation/ Fractional Jet |                           |                  |   |         |      |  |   |        
|                                   | Revenue ($000)            |                  | $ | 55,193  |      |  | $ | 27,334  | 
|                                   | Volume (thousand gallons) |                  |   | 24,227  |      |  |   | 16,786  | 
|MercFuel Total                     |                           |                  |   |         |      |  |   |        
|                                   | Revenue ($000)            |                  | $ | 245,771 |      |  | $ | 139,890 | 
|                                   | Volume (thousand gallons) |                  |   | 156,579 |      |  |   | 135,114 | 
|                                   | Gross margin ($000)       |                  | $ | 4,191   |      |  | $ | 3,300   | 

Revenue for MercFuels commercial segment
increased $78,022 thousand in the first six months of fiscal
2005 to $190,578 thousand on sales volume of 132,352 thousand
gallons. The increased revenue for the commercial segment is due
to higher average petroleum product prices resulting from
concerns of oil supply disruptions due to the Iraq war, general
tension in the Middle East, production control by OPEC, crude
oil supply disruptions from the Gulf of Mexico due to hurricane
activity and from increased worldwide demand for petroleum
products due to an improving worldwide economy. MercFuels
commercial segments average sales price in the first six
months of fiscal 2005 increased 51.4% over the first six months
of fiscal 2004s average sales price. The increased average
sales price in the first six months of fiscal 2005, as compared
to the first six months of fiscal 2004, represents increased
revenue of approximately $64,682 thousand. MercFuels
commercial sales volume increased in the first six months of
fiscal 2005 to 132,352 thousand gallons, an increase of 14,024
thousand gallons, or 11.9%, from MercFuels first six
months of fiscal 2004s commercial

22



---



##### 



sales volume of 118,328 thousand gallons. The
increased sales volume in the first six months of fiscal 2005,
as compared to the first six months of fiscal 2004, represents
increased revenue of approximately $13,340 thousand.


Revenue for MercFuels corporate/fractional
jet ownership segment was $55,193 thousand on sales volume of
24,227 thousand gallons in the first six months of fiscal 2005,
an increase of $27,859 thousand, or 101.9%, and 7,441 thousand
gallons, or 44.3%, from the first six months of fiscal
2004s revenue of $27,334 thousand on sales volume of
16,786 thousand gallons. The increase in sales revenue is due to
the increase in worldwide petroleum product prices, increased
use of private aircraft for both business and personal travel
and MercFuels strategic focus on this business segment.
The average sales price for aviation jet fuel in the
corporate/fractional jet ownership segment in the first six
months of fiscal 2005 increased 39.9% as compared to the first
six months of fiscal 2004 equating to increased revenue of
approximately $15,742 thousand. The increased sales volume
equates to an increase in revenue of approximately $12,117
thousand.

MercFuels cost of aviation fuel was
$239,156 thousand in the first six months of fiscal 2005 which
represents an increase of 78.1% from MercFuels cost of
aviation fuel in the first six months of fiscal 2004 of $134,299
thousand. The average cost of aviation fuel per gallon increased
53.7% in the first six months of fiscal 2005 to $1.527 per
gallon. The increase in the average cost of aviation fuel per
gallon equates to an increase in the cost of aviation fuel of
$83,521 thousand. The increase in the volume of aviation fuel
purchased resulted in an increase in the cost of aviation fuel
of $21,336 thousand. MercFuels operating expenses,
excluding the cost of aviation fuel, were $2,424 thousand in the
first six months of fiscal 2005, an increase of $134 thousand
from the first six months of fiscal 2004s operating
expense excluding aviation fuel cost of $2,291 thousand.

Air Cargos revenue was $22,578 thousand in
the first six months of fiscal 2005, an increase of $3,001
thousand, or 15.3%, from the first six months of fiscal 2004
revenue of $19,577 thousand resulting in gross margin of $2,759
thousand in the first six months of fiscal 2005, an increase of
$1,463 thousand from last years gross margin of $1,296
thousand.

|                    |                                    |                  |   |        |        |  |   |        |        | 
|------------------- | ---------------------------------- | ---------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                    |                                    |                 
|                    |                                    | Six Months Ended |  
|                    |                                    | December 31,     |  
|                    |                                    |                  |  
|                    |                                    | 2004             |   |        | 2003   | 
|                    |                                    |                  |   |        |        | 
|Revenue ($000)      |                                    |                  |   |        |        |  |   |       
|                    | Cargo handling                     |                  | $ | 14,816 |        |  | $ | 13,128 |       
|                    | Cargo logistics services           |                  |   | 5,347  |        |  |   | 4,161  |       
|                    | Cargo general sales agent services |                  |   | 2,415  |        |  |   | 2,288  |       
|                    |                                    |                  |   |        |        | 
|                    |                                    | Air Cargo total  |   | $      | 22,578 |  |   | $      | 19,577 | 
|Gross margin ($000) |                                    |                  |   |        |        |  |   |       
|                    | Cargo handling                     |                  | $ | 2,113  |        |  | $ | 1,463  |       
|                    | Cargo logistics services           |                  |   | 1,330  |        |  |   | 873    |       
|                    | Cargo general sales agent services |                  |   | 119    |        |  |   | (84    | )     
|                    | Cargo administrative               |                  |   | (803   | )      |  |   | (956   | )     
|                    |                                    |                  |   |        |        | 
|                    |                                    | Air Cargo total  |   | $      | 2,759  |  |   | $      | 1,296  | 

The cargo handling segment reported revenue of
$14,816 thousand in the first six months of fiscal 2005, an
increase of $1,688 thousand, or 12.9%, from the first six months
of fiscal 2004 revenue of $13,128 thousand. Cargo
handlings gross margin in the first six months of fiscal
2005 was $2,113 thousand, an increase of $650 thousand, or
44.4%, from the first six months of fiscal 2004 gross margin of
$1,463 thousand. The improved results are mainly due to
increased cargo handling volume as a result of an improved
worldwide economy and Air Cargos focus on cost control.

The cargo logistics services segment reported
revenue of $5,347 thousand in the first six months of fiscal
2005, an increase of $1,186 thousand or 28.5%, from the first
six months of fiscal 2004 revenue of $4,161 thousand. The
increased revenue in the first six months of fiscal 2005 is
mainly due to the increased business activity associated with
Air Cargos Mercury World Cargo (MWC)
operation. Cargo logistics services

23



---



##### 



segments gross margin in the first six
months of fiscal 2005 increased $457 thousand from the first six
months of fiscal 2004 to $1,330 thousand. The increased gross
margin is due to the increased business activity associated with
various airline management contracts and MWC operations.


The cargo general sales agent (GSA) services
segment reported revenue of $2,415 thousand in the first six
months of fiscal 2005, an increase of $127 thousand from the
first six months of fiscal 2004 revenue of $2,288 thousand. The
GSA services gross margin in the first six months of
fiscal 2005 was $119 thousand, an increase of $203 thousand from
the first six months of fiscal 2004 loss of $84 thousand. The
increase in GSAs gross margin is due to Air Cargos
focus on cost control.

Air Cargos administrative expenses in the
first six months of fiscal 2005 were $803 thousand, a decrease
of $153 thousand from last year.

Maytag reported revenue of $10,343 thousand in
the first six months of fiscal 2005, a reduction of $1,399
thousand from the first six months of fiscal 2004 revenue of
$11,742 thousand. Maytags first six months of fiscal 2005
gross margin was $2,529 thousand, a decrease of $214 thousand
from the first six months of fiscal 2004 gross margin of $2,743
thousand.

|               |              |                  |   |       |        |  |   |       |        | 
|-------------- | ------------ | ---------------- | - | ----- | ------ |  | - | ----- | ------ | 
|               |              |                 
|               |              | Six Months Ended |  
|               |              | December 31,     |  
|               |              |                  |  
|               |              | 2004             |   |       | 2003   | 
|               |              |                  |   |       |        | 
|Revenue ($000) |              |                  |   |       |        |  |   |      
|               | Refueling    |                  | $ | 3,478 |        |  | $ | 4,296 |       
|               | Air Terminal |                  |   | 3,775 |        |  |   | 3,867 |       
|               | BOS          |                  |   | 2,488 |        |  |   | 2,984 |       
|               | Weather Data |                  |   | 588   |        |  |   | 574   |       
|               | Other        |                  |   | 14    |        |  |   | 21    |       
|               |              |                  |   |       |        | 
|               |              | Total Maytag     |   | $     | 10,343 |  |   | $     | 11,742 | 

The decrease in Maytags revenue is due to
the non-renewal of one refueling contract in the first quarter
of fiscal 2005 and the non-renewal of one refueling contract and
one BOS contract during fiscal 2004. The decrease of
Maytags gross margin is due to a retroactive wage increase
on a government BOS sub-contract in the second quarter of fiscal
2004 and the non-renewal of contracts.

Bad debt expense for continuing operations in the
first six months of fiscal 2005 totaled $364 thousand, as
compared to a benefit of $24 thousand in the first six months of
fiscal 2004 as a result of the reversal of previously
established bad debt reserves in the second quarter of fiscal
2004 due to better than expected customer collections
experience. The Company experienced no significant individual
write-offs during the first six months of fiscal 2005.

Selling, general and administrative
(G&A) expenses in the first six months of fiscal
2005 amounted to $7,028 thousand, an increase of $1,984 thousand
or 39.3% from the first six months of fiscal 2004 expenses of
$5,044 thousand. The increase in G&A expenses is mainly due
to increased legal expenses from outside independent legal
counsel in connection with certain litigation and severance
costs. The Company expects that certain G&A expenses will
significantly increase in fiscal 2005 as compared to fiscal 2004
as the Company incurs increased legal fees associated with the
Signature lawsuit and due to the newly effective internal
control and other requirements of the Sarbanes-Oxley Act of
2002. See Government Regulations above.

Depreciation and amortization expense from
continuing operations was $1,254 thousand in the current period
as compared to $1,426 thousand last year.

Interest and other expense from continuing
operations in the current period was $530 thousand, an increase
of $244 thousand from last years interest and other
expense from continuing operations of $286 thousand. The
increase in interest and other expense is mainly due to the
recording of the loss on disposal of assets of $114 thousand in
the second quarter of fiscal 2005.

24



---



##### 



The Company recognized an impairment loss
associated with the MercMed aircraft in the amount of $626
thousand in the first quarter of fiscal 2005 as the result of an
asset impairment valuation. For more detailed information on
this transaction, please refer to Note 7 
Impairment of Long-lived Assets.

The Company recorded income of $181 thousand from
minority interest associated with MercMed in the first six
months of fiscal 2005 as compared to income of $4 thousand in
the first six months of fiscal 2004. The increase in income from
minority interest is due to the recognition of the
MercMeds minority members share of the impairment
loss associated with the MercMed asset.

The Company recognized settlement expense of
$1,799 thousand in the second quarter of fiscal 2004 associated
with the J.O Hambro settlement. See Exhibit 10.34 as filed
with this 10-Q.

The effective income tax rate in the first six
months of fiscal year 2005 was 14.7% compared to 0.7% in the
same period last year. The Hambro settlement cost of $1,799
thousand recognized by the Company in the second quarter of
fiscal 2004 is not deductible in determining taxable income
resulting in a permanent book to tax difference.

The reduction in retained earnings from fiscal
year ending June 30, 2004 was primarily due to payment of
the $17,500 thousand dividend on November 5, 2004. See
Note 13.

The Company may experience decreases in future
sales volume and margins as a result of deterioration in the
world economy, or in the aviation industry, and continued
conflicts and instability in the Middle East, Asia and Latin
America, as well as a result of potential future terrorist
activities and possible military retaliation. Through the
Companys first six months of fiscal 2005, petroleum
product prices, including aviation fuel, have either achieved or
been close to historical high levels. This sustained price level
places additional financial burden on many of the Companys
customers. If the Companys customers are not able to pass
on the higher petroleum product prices to its customers, they
may experience financial hardship which may result in the
Company experiencing longer collection terms, which will place
additional financial burden on the Company, or higher level of
uncollectible accounts.

Liquidity and Capital Resources

As of December 31, 2004, the Companys
cash and cash equivalents were $6,316 thousand, an increase of
$1,626 thousand from cash and cash equivalents of $4,690
thousand as of June 30, 2004.

Net cash used in operations in the first six
months of fiscal 2005 was $5,026 thousand, as compared to net
cash generated from operations of $4,524 thousand in the first
six months of fiscal 2004. The net cash used in operations in
the first six months of fiscal 2005 include payments of $1,890
thousand associated with the retirement of the Chairman of the
Board, $615 thousand associated with a settlement agreement with
David H. Murdock (see Exhibit 10.35 as filed with this
10-Q) and related parties (Murdock), and $2,964
thousand associated with the Companys income tax
obligations.

In the first six months of fiscal 2005, the
Company generated $15,146 thousand of cash from investing
activities as compared to $1,801 thousand used in the first six
months of fiscal 2004. On July 29, 2004, the effective date
of the senior secured credit facility with Bank of America, N.A.
(Bank of America), $15,414 thousand of the LOC
Reserve became unrestricted as the outstanding letters of credit
issued on behalf of the Company by Bank of America were secured
by the collateral base of the Bank of America Credit Facility.
The Company also expended $1,125 thousand for additions to
property, equipment and leaseholds in the first six months of
fiscal 2005.

The Company used $8,644 thousand in financing
activities in the first six months of fiscal 2005 primarily due
to the one-time special common stock cash dividend payment of
$17,500 thousand in the second quarter of fiscal 2005 which was
funded, in part, by a cash advance on the B of A Credit Facility
in the amount of $10,000 thousand. The Company received $1,687
thousand in the second quarter of fiscal 2005 as a result of the
exercise of stock options and warrants. The Company purchased
150,000 shares of common stock for $6.00 per share in
accordance with the settlement agreement with Murdock in the
first quarter of fiscal 2005.

25



---



##### 



On July 29, 2004, the Company and Bank of
America entered into a three-year $30,000 thousand revolving
credit line (the B of A Credit Facility)
collateralized by all of the assets of the Company, the terms of
which were amended effective November 1, 2004. In
accordance with the terms of the loan agreement, as amended, the
revolving line of credit is used as collateral for any letters
of credit issued by the Company and for general working capital
needs. Upon the effective date of the B of A Credit Facility,
$15,414 thousand of cash deposited by the Company as collateral
for outstanding letters of credit and reported as restricted
cash on the Companys balance sheet at June 30, 2004
was released to the Company for general corporate purposes. As
of December 31, 2004, the Company had $2,931 thousand
of unused revolving credit line available under the B of A
Credit Facility. The amount of credit available to the Company
on the B of A Credit Facility, as amended, is
determined monthly and is equal to the lesser of 1) sum of:
a) 80% of the balance due on Domestic Eligible Receivables
less b) $2,000 thousand; and 2) $30,000 thousand. The
B of A Credit Facility, as amended, contains certain
financial covenants limiting the amount the Company can expend
annually for capital expenditures to $2,000 thousand. The
B of A Credit Facility, as amended, also prohibits the
repurchase of stock and the payment of cash dividends, except
for cash dividends in an amount not to exceed $17,500 thousand
by June 30, 2005. The Company is also required to maintain
certain financial targets for tangible net worth and fixed
charges. The Company is in compliance with all of the terms and
conditions of the B of A Credit Facility.

On October 6, 2004, the Company announced
that its Board of Directors declared a one-time special cash
dividend totaling $17,500 thousand, that would be payable on a
pro rata basis to holders of record of its common stock as of
the close of business on October 18, 2004. The dividend was
paid on November 5, 2004. Based on 3,056,355 shares of
its common stock outstanding as of the close of business on
October 18, 2004, the dividend payable per common share was
$5.70. The amount payable per share of common stock was net of
the mandatory dividend payments of approximately $70 thousand on
the Companys outstanding Series A 8% Cumulative
Convertible Preferred Stock (the Preferred Stock) as
of the dividend payment date of November 5, 2004.

On November 2, 2004 the Company requested
and received a cash advance of $10,000 thousand from the B of A
Credit Facility. The funds received as a cash advance were used
to fund the one-time special cash dividend and to meet on-going
working capital requirements. As of December 31, 2004, the
Companys borrowing under the revolving credit line was
$8,000 thousand.

On November 1, 2004, the Company and Bank of
America entered into the LOC and Reimbursement Agreement
relating to the outstanding tax exempt bonds issued in 1998
pursuant to a loan agreement between the Company and CEDFA. As
of November 1, 2004, the outstanding principal amount of
the bonds outstanding was $14,000 thousand. In accordance with
the terms of the LOC and Reimbursement Agreement, Bank of
America has issued the CEDFA LOC that replaced the previously
existing irrevocable direct pay letter of credit issued by Wells
Fargo Bank, N.A. on behalf of the Company, which was
simultaneously cancelled upon issuance of the CEDFA LOC. In
addition to the issuance of the CEDFA LOC, the LOC and
Reimbursement Agreement require the Company to call for
redemption bonds in the principal amount of $500 thousand on
each of April 1 and October 1 commencing on
April 1, 2005. The CEDFA LOC was issued by Bank of America
as part of the B of A Credit facility.

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, 2004.






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

There has been no material change during the six
month period ended December 31, 2004 from the disclosures
regarding market risk presented in the Companys Annual
Report on Form 10-K for the fiscal year ended June 30,
2004.

26



---



##### 








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

Evaluation of Disclosure Controls and
Procedures

Based on evaluations as of December 31,
2004, 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.

Changes in Internal Control over Financial
Reporting

During the period covered by this quarterly
report on Form 10-Q, the Company has not made any changes
to its internal control over financial reporting (as referred to
in paragraph 4(c) of the Certifications of the
Companys principal executive officer and principal
financial officer included as exhibits to this report) that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.




PART II  OTHER
INFORMATION






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

On March 14, 2003, the Company received a
Notice of Violation from the United States Environmental
Protection Agency (EPA) alleging certain
deficiencies in the Companys spill prevention, control and
countermeasure plan (SPCC Plan) for the Air
Centers Fort Wayne, Indiana facility. The Company
believes that it has resolved all deficiencies except for
alleged deficiencies related to: 1) secondary containment
for refueling trucks, and 2) secondary containment for
discrete fuel loading areas. Pursuant to an agreement detailed
in a letter submitted to the EPA on April 16, 2003, the
Company was permitted to suspend modifications to its SPCC Plan
regarding the installation of secondary containment for its
parked refueling trucks and loading areas, pending resolution of
federal regulatory issues associated with SPCC requirements.

The Stock Purchase Agreement between the Company
and Allied dated as of October 28, 2003 regarding the sale
of all of the outstanding stock owned by the Company in Air
Centers (the Air Centers SPA), provides that
the Company shall be responsible for compliance, for a period of
eighteen months subsequent to the FBO Sale Closing Date, for any
required secondary containment (as the term is defined in the
Air Centers SPA) required by any applicable governmental
authority requiring secondary containment pursuant to
environmental law for extended or overnight fuel truck parking
at any FBO comprising the FBO business on the FBO Sale Closing
Date.

Pursuant to a letter dated October 18, 2004,
from the EPA to the Air Centers Ft. Wayne facility
(the Facility), the EPA demanded the installation of
secondary containment at the Facility for parked refueling
trucks. While the Company does not believe SPCC requirements
regarding containment are applicable to mobile refueling trucks,
it has agreed to indemnify Air Centers for the reasonable cost
of installation of such containment at the Facility in order to
avoid further transaction costs.

In the opinion of management, the ultimate
resolution of this matter, including the installation of any
secondary containment at other Air Centers facilities, is not
expected to have a material effect on the Companys results
of operations, cash flows or financial position.

On November 26, 2003, Signature Flight
Support Corporation filed a complaint against Air Centers and
Allied alleging: 1) breach of contract against Mercury Air
Centers; 2) Tortious interference with contract against
Allied; 2) Tortious interference with prospective economic
advantage against Allied; and 3) unfair business practices
against Mercury and Allied. 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, losses or expenses to which Allied may

27



---



##### 



become subject as a result of the complaint. On
January 26, 2005 the court granted Allieds motion for
summary judgment dismissing all claims against Allied with
prejudice. The Court also granted Mercury Air Centers motion in
part dismissing in its entirety Signatures unfair business
practices claim and holding that the substantive deal terms of
the parties executed letter of intent were non-binding.
The sole remaining claim of Signature is for breach of the
stand-down provision within the disputed letter of intent
between the parties. The court limited Signatures damages
in that claim to reasonable out of pocket costs and expenses.
This remaining claim is currently set for trial on
March  15, 2005 in Los Angeles federal court. In
addition, on September 22, 2004, Signature Flight Support
Corporation filed a complaint against Mercury Air Group, Inc. in
Los Angeles Superior Court, alleging unfair business practices,
tortious interference with contract and prospective economic
advantage and fraud. The Company has filed a counterclaim
against Signature Flight Support Corporation and others for
fraud, negligent misrepresentation and other claims in the Los
Angeles Superior Court action. Signature filed an amended
complaint on or about February 1, 2005. The Company
believes these allegations have no merit and will also be
vigorously disputed and defended. In the opinion of management,
the ultimate resolution of these complaints will not have a
material effect on the Companys consolidated financial
statements.


On July 14, 2004, Leon Shabott filed suit in
the United States District Court, District of Massachusetts
against Mercury Air Group, Inc. for damages arising out of the
repair of Beechcraft twin Bonanza aircraft engines in June of
1998 claiming damages of up to $150 thousand. The Company
believes that the claim is barred by the statute of limitations
and that it has other good and viable defenses as well. In the
opinion of management, the ultimate resolution of this matter is
not expected to have a material effect on the Companys
results of operations, cash flows or financial position.

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 the Companys
results of operations, cash flows or financial position.
Reference is made to the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2004 for
additional legal matters with respect to which no material
developments have occurred in the current quarter.






|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds

(a) None

(b) None

(c) Issuer Purchases of Equity
Securities:

|                                                   |  |            |       |  |                |   |                     |                        |  |                    |                       |  |  |  |     | 
|-------------------------------------------------- |  | ---------- | ----- |  | -------------- | - | ------------------- | ---------------------- |  | ------------------ | --------------------- |  |  |  | --- | 
|                                                   |  |            |       |  |                |   |                     | (d) Maximum Number (or | 
|                                                   |  | (a) Total  |       |  |                |   | (c) Total Number of |                        |  | Approximate Dollar |                      
|                                                   |  | Number of  |       |  | (b) Average    |   |                     | Shares (or Units)      |  |                    | Value) of Shares (or  | 
|                                                   |  | Shares     |       |  | Price          |   |                     | Purchased as Part of   |  |                    | Units) that May Yet   | 
|                                                   |  | (or Units) |       |  | Paid per Share |   |                     | Publicly Announced     |  |                    | be Purchased Under    | 
|Period                                             |  | Purchased  |       |  | (or Unit)      |   |                     | Plans or Programs      |  |                    | the Plans or Programs | 
|                                                   |  |            |       |  |                |   |                     |                        |  |                    |                       | 
|Month #1 October 1, 2004 to
    October 31, 2004   |  |            | 0     |  |                |   | N/A                 |                        |  |                    | N/A                   |  |  |  | N/A | 
|Month #2 November 1, 2004 to
    November 30, 2004 |  |            | 0     |  |                |   | N/A                 |                        |  |                    | N/A                   |  |  |  | N/A | 
|Month #3 December 1, 2004 to
    December 31, 2004 |  |            | 8,750 |  |                |   | 4.90                |                        |  |                    | N/A                   |  |  |  | N/A | 
|                                                   |  |            |       |  |                |   |                     |                        |  |                    |                       | 
|Total                                              |  |            | 8,750 |  |                | $ | 4.90                |                        |  |                    |                       |  |  |  |     | 
|                                                   |  |            |       |  |                |   |                     |                        |  |                    |                       | 

The B of A Credit Facility, as amended, prohibits
the repurchase of stock and the payment of cash dividends,
except for cash dividends in an amount not to exceed $17,500
thousand by June 30, 2005.

28



---



##### 








|        |                                   
|------- | ----------------------------------
|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

|        |      |  |             |                                                                                                                                                                                                                                                                                                                                          
|------- | ---- |  | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 2.1  |  |             | 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)                                                                                                                                                                        
|       
|        | 2.2  |  |             | Amendment to Stock Purchase Agreement by and
    Among Allied Capital Corporation, Mercury Air Centers, Inc. and
    Mercury Air Group, Inc. dated as of December 10, 2003.(31)                                                                                                                                                          
|       
|        | 2.3  |  |             | Amendment to Stock Purchase Agreement by and
    Among Allied Capital Corporation, Mercury Air Centers, Inc. and
    Mercury Air Group, Inc. dated as of January 14, 2004.(31)                                                                                                                                                           
|       
|        | 2.4  |  |             | Amendment to Stock Purchase Agreement by and
    Among Allied Capital Corporation, Mercury Air Centers, Inc. and
    Mercury Air Group, Inc. dated as of February 13, 2004. (32)                                                                                                                                                         
|       
|        | 2.5  |  |             | Settlement Statement dated as of April 12,
    2004.(33)                                                                                                                                                                                                                                                                                 
|       
|        | 2.6  |  |             | Closing Escrow Agreement dated as of
    April 5, 2004 among Allied and Wachovia Bank National, as
    escrow agent. (33)                                                                                                                                                                                                                
|       
|        | 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)                                                                                                                                                                                                    
|       
|        | 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)                                                                                                                                                                                                                    

29



---



##### 



|        |      |  |             |                                                                                                                                                                                                                                     
|------- | ---- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|       
|        | 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)                                                                                                                                
|       
|        | 4.27 |  |             | Fifth Amendment to Security and Loan Agreement
    and Forbearance Agreement dated as of December 5, 2003 by
    and among Wells Fargo Foothill, Mercury Air Group, Inc. and
    certain of its subsidiaries.(31)                   
|       
|        | 4.28 |  |             | Amendment letter to Forbearance Term and New
    Covenant Default dated as of February 16, 2004. (32)                                                                                                                               
|       
|        | 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)*                                                                                                                                                                 
|       
|        | 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)*                                                                                                                                                                

30



---



##### 



|        |       |  |             |                                                                                                                                                                                                                               
|------- | ----- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|No.     |       |  | Description
|        |       |  |            
|       
|        | 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)                                                                                                      
|       
|        | 10.19 |  |             | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of December 31, 2001.(21)                                                                                                                 
|       
|        | 10.20 |  |             | 2002 Management Stock Purchase Plan.(22)                                                                                                                                                                                      
|       
|        | 10.21 |  |             | Amended and Restated Employment Agreement dated
    May 22, 2002 between Mercury Air Group, Inc. and Joseph A.
    Czyzyk.(22)*                                                                                               
|       
|        | 10.22 |  |             | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Wayne J. Lovett.(22)*                                                                                                                         
|       
|        | 10.23 |  |             | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and John Enticknap. (22)*                                                                                                                         
|       
|        | 10.24 |  |             | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Mark Coleman.(22)*                                                                                                                            
|       
|        | 10.25 |  |             | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Steven S. Antonoff. (22)*                                                                                                                     
|       
|        | 10.26 |  |             | Employment Agreement dated May 22, 2002
    between Mercury Air Group, Inc. and Robert Schlax.(22)*                                                                                                                           
|       
|        | 10.27 |  |             | Limited waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as of June 27, 2002.(24)                                                                                                                     
|       
|        | 10.28 |  |             | Sale-Leaseback agreement made by and between CFK
    Realty Partners, LLC and Mercury Air Group, Inc. dated
    December 15, 2001.(24)                                                                                        
|       
|        | 10.29 |  |             | Amendment to Sale-Leaseback agreement made by and
    between CFK Realty Partners, LLC and Mercury Air Group, Inc.(24)                                                                                                        
|       
|        | 10.30 |  |             | Promissory Note dated July 1, 2004 by CFK
    Realty Partners, LLC in favor of Mercury Air Group, Inc. (24)                                                                                                                   
|       
|        | 10.31 |  |             | Limited Waiver and Consent to Revolving Credit
    and Term Loan Agreement dated as June 27, 2002.(24)                                                                                                                        

31



---



##### 



|        |       |  |             |                                                                                                                                                                                                                                                                                       
|------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|No.     |       |  | Description
|        |       |  |            
|       
|        | 10.32 |  |             | 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 |  |             | 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)
|       
|        | 10.35 |  |             | Settlement Agreement by and between:
    1) David H. Murdock as trustee of the David H. Murdock
    Living Trust dated May 28, 1996, as amended, d/b/a Pacific
    Holding Company and using nominee PCS001 and 2) Mercury Air
    Group, Inc. dated July 16, 2004. (34)              
|       
|        | 10.36 |  |             | Loan Agreement dated as of July 29, 2004 by
    and among Bank of America N.A, Mercury Air Group, Inc. and
    certain subsidiaries. (35)                                                                                                                                             
|       
|        | 10.37 |  |             | First Amendment to Loan Agreement by and among
    Bank of America, N.A., Mercury Air Group, Inc. and certain
    subsidiaries. (37)                                                                                                                                                  
|       
|        | 10.38 |  |             | Letter of Credit and Reimbursement Agreement as
    of November 1, 2004 between Mercury Air Group, Inc. and
    Bank of America. (38)                                                                                                                                                 
|       
|        | 10.39 |  |             | Amended and Restated Lease entered into as of
    November 10, 2004 and effective as of July 1, 2004 by
    and between CFK Realty Partners, LLC. and Mercury Air Group,
    Inc. (39)                                                                                                
|       
|        | 10.40 |  |             | Amendment No. 2 to Amended and Restated
    Employment Agreement by and between Mercury Air Group, Inc. and
    Joseph A. Czyzyk.*(39)                                                                                                                                                
|       
|        | 10.41 |  |             | Agreement entered into on November 10, 2004
    and effective on October 28, 2004 by and between Mercury
    Air Group, Inc. and Dr. Philip J. Fagan. (39)                                                                                                                            
|       
|        | 10.42 |  |             | Severance Agreement and General and Special
    Release between Mercury Air Group, Inc., and Robert Schlax
    entered into on January 17, 2005.(40)                                                                                                                                  
|       
|        | 10.43 |  |             | Second Amendment to Loan Agreement dated
    January 31, 2005 by and among Bank of America, N.A.,
    Mercury Air Group, Inc. and certain subsidiaries.                                                                                                                               
|       
|        | 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  |  |             | Amended and Restated Partnership Agreement dated
    as of July 30, 2004 of CK Partners by and among Frederick
    H. Kopko, Jr. and Joseph A. Czyzyk. (36)                                                                                                                           



---



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| | * | 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.                            

32



---



##### 





|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.      
|    
|(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.           

33



---



##### 





|     |                                                                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(31) | All such documents were previously filed as an
    Exhibit to the Companys Quarterly Report on Form 10-Q
    for the quarter ended December 30, 2003 and are
    incorporated herein by reference.
|    
|(32) | 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, 2004 and are incorporated
    herein by reference.   
|    
|(33) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K filed on
    April 22, 2004 and dated April 12, 2004 and is
    incorporated herein by reference. 
|    
|(34) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    July 16, 2004 and is incorporated herein by reference.                                     
|    
|(35) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    July 30, 2004 and is incorporated herein by reference.                                     
|    
|(36) | 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, 2004 and are incorporated
    herein by reference.          
|    
|(37) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    October 27, 2004 and is incorporated herein by reference.                                  
|    
|(38) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    November 1, 2004 and incorporated herein by reference.                                     
|    
|(39) | Such document was previously filed as an Exhibit
    to the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2004 and are incorporated
    herein by reference.     
|    
|(40) | Such document was previously filed as an Exhibit
    to the Companys Current Report on Form 8-K on
    January 17, 2005 and incorporated herein by reference.                                     

34



---



##### 






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/ KENT ROSENTHAL           
| |                              
| | Kent Rosenthal               
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: February 14, 2004

35