~~Table~~ UNITED ofSTATES ~~Contents~~SECURITIES AND EXCHANGE COMMISSION

~~UNITED~~Washington, D.C. ~~STATES OF AMERICA~~20549

~~SECURITIES AND EXCHANGE COMMISSION~~Form 10-Q

Washington, D.C. 20549


(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

~~Form~~Commission File No. 101-Q7134

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

Mercury Air Group, Inc.

~~Commission~~(Exact ~~File~~name ~~No.~~of ~~1-7134~~registrant as specified in its charter)

Mercury Air Group, Inc.


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)

~~(Exact~~Registrant’s ~~name~~telephone ofnumber, ~~registrant~~including area ~~as specified in its~~code: ~~charter)~~

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

(310) 827-2737

Indicate by check mark whether the Registrant’s (1) has ~~telephone~~filed ~~number~~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), ~~including~~and ~~area~~(2) has ~~code:~~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 (~~310)~~as defined in Rule ~~827~~12b-~~2737~~2 of the Exchange Act). Yes o No þ

Indicate ~~by check mark whether~~ the ~~Registrant (1) has~~number ~~filed~~of ~~all~~shares ~~reports~~outstanding ~~required~~of ~~to be filed by~~each ~~Section 13 or 15(d)~~ of the ~~Securities~~issuer’s ~~Exchange~~classes ~~Act~~ of ~~1934 during~~common ~~the~~equity, ~~preceding~~as ~~12 months~~of ~~(or for such shorter period that~~ the ~~registrant was required to file such reports), and~~latest ~~(2) has~~practicable ~~been subject to such filing requirements for the past 90 days~~date. ~~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


	Number of Shares Outstanding
Title	as of February 08, 2004

Common Stock, $0.01 Par Value		3,056,355

~~Indicate~~TABLE ~~the~~OF ~~number of shares outstanding of each~~CONTENTS ~~of the issuer’s classes of common equity, as of the latest~~ ~~practicable date.~~

	Number of Shares Outstanding
			Page
Title	as of January 7, 2004
PART I
Common Stock, $0.01 Par Value		2,954,818
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

~~TABLE OF CONTENTS~~1

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

PART I — FINANCIAL INFORMATION

~~Table~~Item of1. ~~Contents~~Financial Statements

~~PART I — FINANCIAL~~MERCURY AIR GROUP, INC. AND ~~INFORMATION~~SUBSIDIARIES

~~Item 1. Financial~~CONSOLIDATED BALANCE SHEETS ~~Statements~~

MERCURY AIR GROUP, INC. AND SUBSIDIARIES


			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

~~CONSOLIDATED~~See ~~BALANCE~~accompanying ~~SHEETS~~notes to consolidated financial statements.

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

~~See~~MERCURY ~~accompanying~~AIR ~~notes~~GROUP, toINC. ~~consolidated financial~~AND ~~statements.~~SUBSIDIARIES

2 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	)

~~MERCURY~~See ~~AIR~~accompanying ~~GROUP,~~notes ~~INC.~~to ~~AND~~consolidated financial ~~SUBSIDIARIES~~statements.

3 ~~CONSOLIDATED STATEMENTS OF~~ ~~OPERATIONS~~

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

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

~~See~~CONSOLIDATED ~~accompanying~~STATEMENTS ~~notes~~OF ~~to consolidated financial~~CASH ~~statements.~~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

~~Table~~ Non-Cash investing and financing activities are excluded from the consolidated statement of ~~Contents~~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.

~~MERCURY~~See ~~AIR~~accompanying ~~GROUP,~~notes ~~INC.~~to ~~AND~~consolidated financial ~~SUBSIDIARIES~~statements.

4 ~~CONSOLIDATED STATEMENTS OF CASH~~ ~~FLOWS~~

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

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

~~See~~CONSOLIDATED ~~accompanying~~STATEMENTS ~~notes~~OF ~~to consolidated financial~~STOCKHOLDERS’ ~~statements.~~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

~~Table of Contents~~5

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September~~December 3031, ~~2003~~2004

(Unaudited)

Note 1 — General

Business

Mercury Air Group, Inc. (the “Company”), a Delaware ~~Corporation~~corporation, was organized in 1956 and provides a broad range of services to the aviation industry through ~~four~~three principal operating units: ~~Mercury~~which ~~Air~~are all ~~Centers~~wholly owned subsidiaries of the Company: MercFuel, Inc. (“~~Air Centers~~MercFuel”), a Delaware corporation, Mercury Air Cargo, Inc. (“Air Cargo”), ~~MercFuel,~~a ~~Inc.~~California ~~(“MercFuel”)~~corporation, and Maytag Aircraft Corporation (“Maytag”), a ~~provider~~Colorado ~~of government contract services~~corporation. ~~The~~MercFuel’s ~~Air Centers~~ operations consist of ~~aviation~~the ~~fuel~~sale ~~sales, commercial aircraft refueling~~and ~~operations~~delivery ~~(“into-plane”),~~of ~~aircraft ground support services~~fuel, ~~aircraft~~primarily ~~hangar~~aviation ~~services~~fuel, ~~secured~~to ~~aircraft~~domestic ~~parking (“aircraft tie-down services”)~~ and ~~aircraft~~ ~~maintenance~~international atcommercial ~~certain Air Center locations~~airlines, ~~known~~fractional asjet ~~Fixed~~ownership ~~Based Operations (“FBO’s”)~~companies, ~~for~~corporate ~~commercial, private, general~~ aviation fleets and ~~United~~air ~~States~~cargo ~~Government aircraft (collectively “FBO services”)~~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. ~~MercFuel’s operations~~Maytag ~~consist~~is ofa ~~the~~provider ~~sale and delivery~~ of ~~fuel,~~governmental ~~primarily aviation fuel, to domestic and international commercial airlines, corporate aviation and air freight airlines. Maytag’s government~~ contract services ~~consist of the following services~~performing ~~primarily for agencies of the United States Government:~~ aircraft refueling and fuel storage operations, base operations ~~support~~ support (“BOS”) services, air terminal and ground ~~handling~~ handling services and weather observation and forecasting services primarily for agencies of the government of the United States of America.

OnThrough ~~October~~April 2812, ~~2003~~2004, the Company ~~announced~~operated ~~that~~a itfourth ~~had~~operating ~~entered~~unit, ~~into~~Mercury aAir ~~definitive agreement~~Centers, ~~subject~~Inc. ~~to the~~(“Air ~~Company’s~~Centers”). ~~stockholders~~Air Centers’ ~~approval,~~operations ~~completion~~consisted of aviation ~~due~~fuel sales, aircraft refueling operations ~~diligence~~(“into-plane”), ~~and~~aircraft ~~regulatory~~ground ~~agencies’~~support ~~approvals~~services, aircraft hangar services, aircraft parking (“aircraft tie-down services”) and ~~consents~~aircraft maintenance at certain Air Center locations, known as Fixed Based Operations to(“FBO’s”). ~~sell~~On ~~100%~~April 12, of2004 (the ~~outstanding~~“FBO Sale ~~common~~Closing ~~stock~~Date”), following stockholder approval, the Company sold all of Air Centers outstanding common stock to Allied Capital Corporation (“Allied”) for $~~70 million~~76,349 thousand subject to adjustments ~~(the~~for, ~~“FBO Sale”).~~among Inother ~~accordance~~things, ~~with~~Air Centers’ ~~the~~net ~~terms~~working capital as of the ~~definitive~~FBO Sale Closing ~~agreement,~~Date asand ~~amended,~~the ~~closing~~distribution of ~~this~~funds ~~transaction~~from isan toescrow ~~occur~~account onestablished ~~January 16,~~at ~~2004~~closing ~~but~~associated with the ~~closing~~Air ~~date~~Centers’ Hartsfield ~~can~~International beAirport ~~extended,~~FBO (the “Hartsfield atFBO”). ~~Allied’s~~The ~~discretion,~~net toworking ~~April~~capital adjustment was finalized during the second quarter of fiscal 2005. See Note ~~16,~~12 ~~2004~~for details. The ~~Company expects~~assets sold through the ~~closing~~sale of the stock of Air Centers (the “FBO ~~sale~~Sale”) toconsisted ~~occur~~of ~~during~~all ~~its~~of ~~third~~the ~~quarter~~assets of ~~fiscal~~the ~~2004~~Company’s FBO business excluding the Company’s FBO at the Long Beach Airport which the Company has retained and continues to operate.

~~Risks~~ As used in this Quarterly Report on Form 10-Q, the term “Company” or “Mercury” refers to Mercury Air Group, Inc. and, unless ~~Uncertainties~~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.

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

5 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

~~Table of Contents~~6

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~the~~currency; ~~close~~changes ofin ~~the FBO Sale~~political, ~~$8.3 million from~~economic, ~~the~~regulatory ~~sale~~or ~~proceeds~~environmental ~~will~~conditions; ~~be deposited into an escrow account pending~~ the ~~award~~loss of akey customers, ~~new~~suppliers ~~lease~~or ~~for~~members ~~the~~of ~~FBO~~senior ~~located~~management; atuninsured ~~Atlanta’s~~losses; ~~Hartsfield~~competition; ~~International~~credit ~~Airport.~~risk Inassociated ~~accordance~~ with ~~the~~accounts receivable; ~~terms~~Sarbanes-Oxley ofAct ~~the~~Section 404 ~~definitive agreement~~compliance costs, asand ~~amended,~~other ~~the closing~~risks ~~date~~detailed ~~for~~in ~~the~~this ~~FBO~~Quarterly ~~Sale~~Report ison Form 10-Q ~~January~~and ~~16,~~in ~~2004~~our ~~with~~other ~~Allied having~~Securities ~~the~~and ~~right~~Exchange Commission tofilings. ~~extend~~We ~~the~~undertake ~~closing~~no ~~date~~obligation ~~through~~to ~~April~~update ~~16,~~or ~~2004.~~revise ~~The~~publicly ~~Company~~any ~~expects~~forward-looking ~~the~~statements, ~~FBO~~whether ~~Sale~~as toa result ~~close~~of ~~during~~new ~~its~~information, ~~third quarter~~future ofevents, ~~fiscal~~or ~~2004~~otherwise.

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

InAccounts ~~April~~receivable ~~2002,~~is ~~the~~comprised ~~Company~~primarily ~~received~~of trade areceivables ~~notice~~ from ~~Los~~ ~~Angeles~~customers ~~World~~and ~~Airports~~is ~~(“LAWA”)~~net of aan ~~proposed rental~~allowance ~~increase~~ for ~~one of Air Cargo’s warehouse facilities~~ atdoubtful ~~LAX (the “Avion Warehouse”)~~accounts. InThe ~~response to this notice, the~~ Company’s ~~submitted~~credit ~~protests~~risk tois ~~the~~based ~~LAWA Staff and~~in ~~Board~~part ~~of Commissioners regarding the proposed increase~~ on the ~~basis~~ ~~that~~following: (1) ~~the~~substantially ~~Company~~all ~~had~~receivables ~~made a substantial~~are ~~investment~~related ~~in the warehouse facility and the proposed rental increase would greatly reduce the Company’s ability~~ to ~~achieve~~ ~~an acceptable rate of return on~~ the ~~Company’s investment~~aviation toindustry, ~~date; (~~2) ifthere ~~any increase~~ is ~~to be made, it should be determined based on the Company being the developer of the facility and not strictly~~ a ~~tenant; and (3) that the~~ ~~amount~~concentration of ~~the~~credit ~~proposed~~risk ~~increase~~as isthere ~~not~~are ~~justified~~several ~~given~~customers ~~the~~who ~~general~~at ~~business~~any ~~environment~~time ofhave ~~the~~significant ~~air~~balances ~~cargo~~owed ~~handling operations. In response~~ to the Company~~’s protests to the proposed increase~~, ~~in September 2002 the Company received a~~and ~~revised~~3) significant ~~notice~~balances ~~from~~are ~~LAWA~~owed ofby acertain ~~reduced~~customers ~~proposal for a rental~~that ~~increase~~are ~~for~~not ~~the~~adequately ~~Avion Warehouse~~capitalized. ~~The~~In ~~LAWA~~addition, ~~Staff intend to~~significantly ~~present~~higher ~~their~~fuel ~~recommended~~prices ~~rental~~for ~~increase~~extended toperiods ~~the LAWA Board~~ of ~~Commissioners~~ ~~for~~time ~~approval~~may inhave ~~late January 2004. From~~a ~~June 18,~~negative ~~2003~~impact ~~through~~on ~~September 30, 2003,~~ the ~~accumulated~~ ~~amount~~aviation ofindustry ~~the~~as ~~retroactive~~it ~~rental increase is~~substantially ~~$1,772,000,~~increases ~~which~~airlines’ ~~will~~operating ~~be partially offset by recoverable retroactive sublease rental income of $742,000~~expenses. ~~The~~Smaller ~~LAWA Staff~~airlines ~~has~~with ~~indicated~~lower ~~that~~levels ~~the retroactive portion~~ of ~~the~~capital ~~rental increase~~may ~~would~~ be ~~payable~~more byseriously ~~the Company in equal monthly installments over the remaining term of the lease agreement, which is scheduled to expire in June 2006~~impacted. The ~~proposed increase~~ inCompany ~~the~~assesses ~~monthly~~its ~~rent,~~credit portfolio on aan ~~go-forward~~ongoing basis, ~~is $64,000, or 35%,~~and ofestablishes ~~the~~allowances ~~existing monthly rent. As of September 30, 2003, the Company has accrued $1,031,000 for the retroactive rental increase,~~ which isit ~~net~~believes ofare ~~the~~adequate ~~recoverable~~to ~~retroactive sublease~~absorb ~~rental~~potential ~~income.~~credit Ofproblems ~~this~~that ~~amount,~~can ~~$113,000~~be ~~was~~reasonably ~~recorded in the first quarter of fiscal 2004~~anticipated.

~~Accounts~~The ~~receivable~~Company ispurchases ~~comprised~~aviation ~~primarily~~fuel ~~of trade receivables~~ from ~~customers~~a limited ~~and~~number ~~is net~~ of ~~an allowance for doubtful accounts~~suppliers. ~~The~~If the Company’s ~~credit~~relationship with ~~risk~~any isof ~~based~~these ~~in part~~key onsuppliers terminates, the ~~following:~~Company ~~1) substantially~~may ~~all receivables are~~not ~~related~~be able to ~~the~~obtain ~~aviation~~a ~~industry,~~sufficient ~~2) there~~quantity isof ~~a concentration~~aviation offuel ~~credit~~on favorable ~~risk~~terms asor ~~there~~may ~~are~~experience ~~several~~difficulty ~~customers~~in ~~who~~obtaining ataviation ~~any~~fuel ~~time~~from ~~have~~alternative ~~significant~~suppliers. ~~balances owed to the Company~~Furthermore, ~~and~~ ~~3) significant~~difficulties ~~balances~~faced ~~are owed~~ by ~~certain~~these ~~customers~~suppliers ~~that are~~or ~~not~~aviation ~~adequately~~fuel ~~capitalized. In addition, significantly~~shortages ~~higher~~or ~~fuel~~the ~~prices~~inability ~~for~~to ~~extended~~obtain ~~periods~~aviation offuel ~~time~~from ~~may~~alternate ~~have a~~sources ~~negative~~at ~~impact~~acceptable onprices ~~the~~and ~~aviation~~terms ~~industry~~could asimpair itthe ~~substantially~~Company’s ~~increases~~ability ~~airlines’~~to ~~operating~~sell ~~expenses.~~aviation ~~Smaller~~fuel ~~airlines with~~to ~~lower~~its ~~levels~~customers ofat ~~capital~~competitive prices ~~may~~and ~~be more seriously impacted~~terms. ~~The~~

6 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.

~~Table~~Basis of ~~Contents~~Presentation

~~MERCURY~~The ~~AIR~~accompanying ~~GROUP~~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, ~~INC~~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. ~~AND~~In the opinion of management, ~~SUBSIDIARIES~~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 ~~NOTES TO CONSOLIDATED FINANCIAL~~ ~~STATEMENTS — Continued~~

~~Company~~MERCURY ~~assesses~~AIR ~~its~~GROUP, ~~credit~~INC. ~~portfolio on an~~AND ~~ongoing basis and establishes allowances which it believes are~~SUBSIDIARIES ~~adequate to absorb potential credit problems that can be reasonably anticipated.~~

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

~~Basis~~New ofAccounting ~~Presentation~~Pronouncements

~~The~~On ~~accompanying~~December 16, ~~unaudited~~2004, ~~financial~~the ~~statements~~Financial ofAccounting ~~Mercury~~Standards ~~Air~~Board ~~Group,~~(“FASB”) ~~Inc.~~issued ~~and~~Statement of ~~subsidiaries~~Financial Accounting Standards (~~the~~ “~~Company~~SFAS”) No. 123R, ~~have~~“Share-Based ~~been~~Payment” (“SFAS No. 123R”). ~~prepared~~This ~~pursuant~~standard requires companies to expense the ~~rules and~~value ~~regulations~~ of ~~the~~employee ~~Securities~~stock options and similar ~~Exchange~~awards. ~~Commission~~Under ~~for~~SFAS No. 123R, share-based ~~interim~~payments ~~financial~~(“SBP”) ~~information.~~awards ~~Accordingly,~~result ~~they~~in doa ~~not~~cost ~~include all~~that ofwill ~~the~~be measured ~~information~~at ~~and~~fair ~~footnotes~~value ~~required~~on bythe ~~accounting principles~~awards’ ~~generally~~grant ~~accepted~~date, inbased on the ~~United~~estimated ~~States~~number of ~~America for~~awards ~~complete~~that ~~financial~~are ~~statements.~~expected Into ~~the~~vest. Compensation ~~opinion~~cost offor ~~management, all~~awards ~~adjustments~~that ~~consisting~~vest ofwould ~~normal~~not ~~recurring~~be ~~adjustments~~reversed ~~and~~if ~~accruals~~the ~~necessary~~awards ~~for~~expire awithout ~~fair~~being ~~presentation~~exercised. ~~have~~When ~~been~~measuring ~~reflected~~fair invalue, ~~these~~companies ~~financial~~can ~~statements~~choose an option-pricing model (e.g., Black-Scholes ~~Operating~~or ~~results~~binomial ~~for~~models) ~~the~~that ~~quarter~~appropriately reflects ~~are~~their ~~not~~specific ~~necessarily~~circumstances ~~indicative~~and the economics of ~~the~~their transactions. ~~results~~Companies ~~that~~will ~~may~~recognize ~~be expected~~compensation cost for ~~the~~SBP awards ~~fiscal~~as ~~year~~they ~~ending~~vest ~~June~~including ~~30,~~the ~~2004~~related ~~due~~tax toeffects. Upon ~~seasonal~~settlement ~~and~~of ~~other~~SBP ~~factors.~~awards, Inthe ~~order~~tax toeffects ~~maintain~~will ~~consistency~~be ~~and~~recognized in ~~comparability~~the ~~between~~income ~~periods~~statement ~~presented,~~or ~~certain~~additional ~~prior~~paid-in ~~period~~capital. Public ~~amounts~~companies ~~have~~are ~~been~~allowed ~~reclassified~~ to ~~conform~~select tofrom ~~the~~three ~~current period~~alternative ~~presentation~~transition methods. The ~~accompanying~~effective ~~financial~~date ~~statements~~for ~~should~~public becompanies is ~~read~~interim inand ~~conjunction~~annual ~~with~~periods ~~the~~beginning ~~audited~~after ~~consolidated~~June 15, ~~financial~~2005, ~~statements~~ and ~~footnotes~~applies ~~thereto~~to ~~included~~all inoutstanding ~~the~~and ~~Company~~unvested SBP awards at a company’s ~~Annual~~ ~~Report~~adoption ondate. ~~Form 10-K~~The ~~for~~Company is currently evaluating the ~~fiscal~~potential ~~year~~impact ~~ended~~of the adoption of ~~June~~SFAS ~~30, 2003~~123R.

~~New~~Note ~~Accounting~~2 ~~Pronouncements~~— Stock-Based Employee Compensation

OnThe ~~April 30,~~Company ~~2003,~~has ~~the~~four ~~Financial~~stock ~~Accounting Standards~~option ~~Board~~plans. ~~(“FASB”)~~As permitted ~~issued~~under ~~Statement~~SFAS No. 123, of“Accounting ~~Financial~~for ~~Accounting~~Stock-Based ~~Standards~~ Compensation” (“SFAS No. 123”), and as amended by SFAS No. ~~149~~148, “~~Amendment~~Accounting offor ~~Statement~~Stock-Based Compensation — ~~133~~Transition ~~on Derivative Instruments~~ and ~~Hedging~~ ~~Activities~~Disclosure” (“SFAS No. 148”), ~~This~~the ~~standard~~Company ~~amends~~measures compensation ~~and~~expense ~~clarifies~~related ~~the accounting~~to ~~for~~employee ~~derivative~~stock ~~instruments,~~options ~~including certain~~granted ~~derivative~~utilizing ~~instruments~~the ~~embedded~~intrinsic invalue ~~other~~method ~~contracts,~~as ~~and~~prescribed ~~for~~by Accounting ~~hedging~~Principles ~~activities~~Board ~~under~~(“APB”) ~~SFAS~~Opinion No. ~~133~~25, “Accounting for ~~Derivative~~ ~~Instruments~~Stock ~~and~~Issued ~~Hedging~~to ~~Activities.~~Employees,” ~~The~~and ~~provisions~~related ofinterpretations. ~~this~~The ~~statement~~following ~~are~~table ~~generally~~illustrates ~~effective~~the ~~for~~pro ~~contracts~~forma ~~entered~~effect ~~into~~on ornet ~~modified~~income ~~after~~(loss) ~~June 30,~~if ~~2003.~~the ~~The~~ Company ~~does~~had ~~not~~applied ~~expect~~the fair ~~this~~value ~~standard~~recognition toprovisions ~~have~~of aSFAS No. 123 ~~material impact~~to onstock-based ~~the~~employee ~~Company’s consolidated financial statements~~compensation.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of “variable interests” and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities considered to be a special purpose entity (“SPE”) in which an enterprise holds a variable interest that it acquired before February 1, 2003. For non-SPE variable interest entities acquired before February 1, 2003, the interpretation must be adopted no later than the first interim or annual period ending after March 15, 2004. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company is currently evaluating the potential impact of the adoption of FIN 46.



	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	)

7 Note 3 — Income Taxes

~~Table~~ Income oftax ~~Contents~~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~~MERCURY TOAIR ~~CONSOLIDATED~~GROUP, ~~FINANCIAL~~INC. AND ~~STATEMENTS — Continued~~SUBSIDIARIES

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

~~Note~~The 2effective income tax rate from continuing operations was 14.7% (benefit) and 0.7% (benefit) for the six month periods ended December —31, ~~Stock-Based~~2004 ~~Employee~~and 2003, ~~Compensation~~respectively.

InThe ~~December~~effective ~~2002,~~income tax rate from continuing operations for the ~~FASB~~three ~~issued~~month ~~SFAS~~and six month periods ended ~~No.~~December ~~148~~31, ~~“Accounting~~2003 ~~for~~included ~~Stock-Based~~the ~~Compensation Transition~~results ~~and~~of ~~Disclosure.”~~operations ~~SFAS~~for the NoAir Centers. ~~148~~ ~~provides alternative~~The ~~methods~~consolidated statements of ~~transition~~operations for the athree ~~voluntary~~month ~~change~~and tosix ~~the~~month periods ended December 31, ~~fair~~2003 ~~value~~was ~~based~~restated ~~method~~to ofreflect ~~accounting~~the ~~for~~Air ~~stock-based~~Center ~~employee~~results as ~~compensation~~“Discontinued Operations”. ~~The~~With ~~Company~~this ~~has~~restatement, ~~elected~~the effective totax ~~continue~~rate ~~utilizing~~from continuing operations for the three ~~intrinsic~~month ~~value~~and ~~method~~six tomonth ~~account~~periods ~~for~~ended ~~stock-based~~December 31, ~~compensation~~2004 would ashave ~~allowed~~been by15.0% ~~SFAS~~and No20. ~~123~~1% expense, ~~“Accounting~~respectively, ~~for~~and 39.0% and ~~Stock-Based~~39.0% ~~Compensation~~benefit, respectively, for discontinued operations.”

~~SFAS~~The ~~No. 148~~settlement ~~also~~costs ~~amends~~related ~~the~~to ~~disclosure requirements~~J.O. Hambro of $1,799 ~~SFAS~~thousand ~~No. 123,~~recognized toby ~~require~~the ~~disclosure~~Company in ~~both~~the second quarter ~~interim~~of ~~and~~fiscal ~~annual~~2004 ~~financial~~is ~~statements~~not ~~about~~deductible in the ~~method~~determination of taxable ~~accounting~~income ~~for~~resulting ~~stock-based~~in ~~employee~~a ~~compensation~~permanent ~~and~~book ~~the~~to ~~effect~~tax difference. The ofdifference ~~the~~resulted ~~method~~in ~~used~~an onincrease ~~reported~~in ~~results.~~the ~~SFAS~~income ~~No. 148~~tax isprovision ~~effective~~ for the ~~Company’s~~three ~~fiscal year ended June 30, 2003~~ and ~~for~~six ~~interim~~month ~~financial~~periods ~~statements~~ended ~~beginning January~~December 131, 2003.

~~The~~Note ~~Company~~4 ~~has~~— five stock option plans. As permitted under SFAS No. 123, the Company measures compensation expense related to employee stock options granted utilizing the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations under the intrinsic value method. The following table illustrates the pro forma effect on the net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. Litigation

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

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.

~~Note~~The 3Stock Purchase Agreement between the Company and Allied dated as of October —28, ~~Income~~2003 ~~Taxes~~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.

~~Income~~Pursuant ~~taxes~~to ~~have~~a ~~been~~letter ~~computed~~dated ~~based~~October 18, on2004 from the EPA to the Air Centers’ Ft. Wayne facility ~~estimated~~(the ~~annual~~“Facility”), ~~effective~~the ~~income~~EPA ~~tax~~demanded ~~rate~~the installation of secondary containment at the Facility for parked refueling trucks. While the ~~respective~~Company does not believe SPCC requirements ~~periods~~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.

~~Note~~In ~~4 —~~the ~~Litigation~~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 ~~May~~November 126, ~~2002~~2003, ~~Mercury~~Signature ~~received~~Flight Support Corporation filed a ~~Notice~~complaint against Air Centers and Allied alleging: 1) breach of contract against Mercury Air ~~Violation~~Centers; ~~(“NOV”~~2) tortious ~~for~~interference ~~its~~with ~~Fort~~contract ~~Wayne,~~against Allied; ~~Indiana~~2) Tortious ~~facility~~interference with prospective economic ~~alleging~~advantage ~~that~~against ~~Mercury’s~~Allied; ~~Spill~~and ~~Prevention,~~3) unfair ~~Control~~business practices against Mercury and Allied. The Company has agreed to indemnify ~~Countermeasure~~Allied ~~Plan~~and its affiliates (including, without limitation, Air Centers after the ~~“SPCC~~closing ~~Plan”~~of the FBO sale), ~~did~~directors, ~~not~~officers, agents, ~~meet~~employees and controlling persons from any liability, ~~certain~~obligation, ~~federal~~losses ~~regulatory~~or ~~guidelines~~expenses to which Allied may become subject as a result of the complaint. ~~Specifically~~On January 26, 2005 the court granted Allied’s motion for summary judgment ~~Environmental~~dismissing ~~Protection~~all ~~Agency~~claims ~~(“EPA”)~~against ~~alleged~~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

~~Table~~ MERCURY ofAIR ~~Contents~~GROUP, INC. AND SUBSIDIARIES

~~MERCURY~~NOTES ~~AIR~~TO ~~GROUP,~~CONSOLIDATED ~~INC. AND~~FINANCIAL ~~SUBSIDIARIES~~STATEMENTS — (Continued)

~~NOTES~~the TOsubstantive ~~CONSOLIDATED~~deal ~~FINANCIAL~~terms of the parties’ ~~STATEMENTS~~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 ~~Continued~~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.

that Mercury’s SPCC Plan failed to provide for proper parking, secondary containment, and proper drainage of its refueler trucks. Mercury entered into discussions with the EPA and responded to the NOV. On ~~January~~July 2914, ~~2003~~2004, ~~the Company~~Leon ~~was~~Shabott ~~notified~~filed ofsuit ~~some deficiencies~~ in ~~its latest SPCC~~ ~~Plan and requested that Mercury submit a written response to its allegations within 30 days. On March 14, 2003, Mercury received a NOV from~~ the United States ~~Environmental~~District ~~Protection Agency~~Court, ~~Region 5~~District ~~(“EPA~~of ~~Region 5”) alleging~~Massachusetts ~~certain~~against ~~deficiencies~~Mercury inAir ~~the SPCC Plan for its Fort Wayne~~Group, ~~Indiana~~ ~~facility, submitted to the EPA Region 5 in November 2002~~Inc. ~~Mercury believes that it has resolved all deficiencies except~~ for ~~alleged~~damages ~~deficiencies~~arising ~~related~~out toof ~~secondary containment~~the ~~for~~repair ~~refueler~~of ~~trucks,~~Beechcraft ~~and~~twin ~~for~~Bonanza ~~its~~aircraft ~~discrete~~engines ~~fuel~~in ~~loading~~June ~~areas.~~of ~~Pursuant~~1998 toclaiming andamages ~~agreement~~of ~~detailed~~up ~~in a letter submitted~~ to ~~the EPA~~$150 ~~Region 5~~thousand. onThe ~~April 16, 2003, Mercury has been~~Company ~~permitted~~believes tothat ~~suspend~~the ~~modifications~~claim tois ~~its~~barred ~~SPCC~~by ~~Plan regarding~~ the ~~installation~~statute of ~~secondary containment for its refueler~~limitations ~~trucks,~~and ~~pending~~that ~~resolution~~it ~~of federal regulatory issues associated with secondary containment for such trucks. The EPA Region 5~~ has ~~also~~other ~~extended~~good ~~national~~and ~~compliance~~viable ~~with~~defenses ~~regulations related~~as ~~to discrete loading areas until August 17, 2004~~well. In ~~the~~ the opinion of management, the ultimate resolution of this matter is not expected to have a material effect on the Company’s results ~~consolidated~~of operations, cash flows or financial ~~statements~~position.

OnThe ~~April 16,~~Company ~~2003,~~is ~~the~~also ~~Plan~~a ~~Committee~~defendant ofin certain ~~Shuttle~~litigation ~~America~~arising ~~Corp~~in ~~filed~~the anormal ~~Adversary~~course ~~Proceeding~~of inbusiness. ~~the~~In ~~United~~the ~~States~~opinion ~~Bankruptcy~~of ~~Court~~management, ~~District~~the ofultimate ~~Connecticut~~resolution ~~alleging~~of such ~~preferential~~litigation ~~transfers~~will innot have a material effect on the ~~amount~~Company’s results of ~~$995~~operations,~~000.~~ ~~The~~cash ~~parties reached~~flows aor ~~settlement~~financial ~~agreement,~~position. Reference ~~which~~is ~~provides~~made ~~that~~to the Company’s Annual Report on ~~will~~Form 10-K ~~pay~~for ~~Shuttle~~the ~~America~~fiscal ~~$40,000.~~year ~~The~~ended ~~settlement~~June 30, ~~agreement~~2004 isfor ~~subject~~additional legal matters with respect to ~~approval~~which ofno material developments have occurred in the ~~Bankruptcy~~current ~~Court~~quarter.

OnNote ~~November 26,~~5 ~~2003,~~— ~~Signature~~Restricted Flight Support Corporation filed a complaint against Mercury Air Centers, Inc. and Allied Capital Corporation alleging: (1) breach of contract and tortious Interference with contract against Allied; (2) interference with prospective economic advantage against Allied; and (3) unfair business practices against Mercury and Allied. The Company believes that the allegations are without merit and is in the process of preparing a response. The Company has agreed to indemnify Allied and its affiliates (including, without limitation, Air Centers after the closing of the FBO Sale), directors, officers, agents ,employees and controlling persons from any liability, obligation, loss or expense to which Allied may become subject as a result of the complaint. In the opinion of management, the ultimate resolution of this complaint is not expected to have a material effect on the Company’s consolidated financial statements. Cash

OnRestricted cash consists of cash held for specific purposes and not available for general use by the Company. Restricted cash as of December 531, ~~2003,~~2004 ~~the~~is comprised ~~Company~~of: ~~terminated~~1) $98 thousand on deposit with Wells Fargo ~~its~~Foothill ~~Chief~~as ~~Operating~~reserve ~~Officer~~for outstanding letters of ~~Mercury~~credit ~~Air~~fees; ~~Cargo.~~and 2) $8,320 ~~This~~thousand ~~former~~for an escrow account established on the ~~employee~~FBO isSale ~~claiming~~Closing ~~one~~Date ~~year’s~~associated ~~salary,~~with the Hartsfield FBO (~~approximately~~the ~~$170,000~~“Harstfield Escrow Account”),. ~~and~~The ~~other~~funds ~~damages~~held asin the Hartsfield Escrow Account are to be distributed to either one or both of the Company and Allied over a ~~result~~period not to exceed five years from the FBO Sale Closing Date dependent upon the award of a new lease at the ~~termination~~Hartsfield International Airport in Atlanta for a new FBO. OnDependent upon the effective date of the new ~~December 31~~lease and the terms and conditions of the new lease, ~~2003~~the Company may be entitled to all, hesome ~~filed~~or ~~notice~~none of ~~demand~~the ~~for~~amount ~~mediation~~deposited into the Hartsfield Escrow Account at closing.

~~The~~On ~~Company~~October 11, is2004, ~~also~~the acity ~~defendant~~of inAtlanta notified ~~certain~~Air Centers that it planned on entering into lease ~~litigation~~negotiations ~~arising~~with ina different company for the ~~normal~~FBO ~~course~~at ofthe Hartsfield ~~business.~~International InAirport under the then existing RFP ~~opinion~~process. ofOn ~~management~~November 22, 2004, Air Centers was notified by the ~~ultimate~~airport ~~resolution~~authority ofthat ~~such~~the matter would be re-bid. If a new ~~litigation~~FBO ~~will~~lease at the Hartsfield International Airport is not ~~have~~awarded to aAir ~~material~~Centers, ~~effect~~the amount remaining undistributed in the Hartsfield Escrow Account on ~~its~~the ~~consolidated~~date that Air Centers ceases ~~financial~~operating ~~statements.~~the ~~Reference~~Hartsfield isFBO ~~made~~will be distributed to Allied. Although no assurance can be given by the Company’s that Air ~~Annual~~Centers ~~Report~~will be operating the Hartsfield FBO on ~~Form~~April ~~10-K~~12, 2005, ~~for~~if Air Centers is still operating the ~~period~~Hartsfield ~~ended~~FBO under ~~June 30,~~the ~~2003~~existing ~~for~~lease ~~additional~~terms ~~Litigation~~and ~~Matters~~conditions ~~with~~on April 12, 2005, ~~respect~~the toCompany ~~which~~will nobe ~~material~~entitled ~~developments~~to ~~have~~receive ~~occurred~~$1,654 inthousand from the ~~current~~Hartsfield ~~quarter~~Escrow Account.

Note 5 6 — Debt

On ~~December~~July 3029, ~~2002~~2004, the Company ~~entered into a loan~~ and ~~security~~Bank ~~agreement~~of America, N.A. (“~~the~~Bank ~~Facility”), refinancing~~of ~~its senior secured credit facilities with Foothill Capital Corporation (“Foothill~~America”), aentered ~~division~~into ~~of Wells Fargo Bank, for~~ a ~~five~~ three-year ~~term. In addition~~$30,000 ~~the~~thousand ~~Company~~revolving ~~and J.H.~~line ~~Whitney Co. Mezzanine Fund entered into agreements revising the terms~~ of ~~the~~credit ~~Note, which will mature on December 31, 2005. The funding under~~ (the ~~Facility and the amendments to the~~ ~~Note~~“B ~~were completed on December 31, 2002. On October 28, 2003, Allied acquired the Note from J. H. Whitney Co. Mezzanine Fund and waived certain provisions~~ of ~~the Note.~~A ~~See~~Credit ~~“Note 10 — Subsequent Event~~Facility” ~~for~~) acollateralized ~~description~~by all of the ~~Note and the modified terms associated~~ ~~with the Note.~~assets

910

~~Table~~ MERCURY ofAIR ~~Contents~~GROUP, INC. AND SUBSIDIARIES

~~MERCURY~~NOTES ~~AIR~~TO ~~GROUP,~~CONSOLIDATED ~~INC. AND~~FINANCIAL ~~SUBSIDIARIES~~STATEMENTS — (Continued)

~~NOTES~~of TOthe ~~CONSOLIDATED~~Company, ~~FINANCIAL~~the terms of which were amended ~~STATEMENTS~~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 ~~Continued~~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.

~~The~~On ~~Facility~~November 2, ~~provides~~2004, athe ~~total~~Company ~~of up to~~requested ~~$42.5 million in revolving~~ and ~~term~~received ~~loans.~~a ~~The~~cash ~~term~~advance ~~loan~~on ~~is for an amount equal to $12.5 million, while~~ the ~~revolving loan~~B ~~is for an amount not to exceed 85%~~ of ~~Eligible~~A ~~Accounts Receivable~~Credit ~~(as~~Facility ~~defined~~ in the ~~loan agreement), subject to~~ ~~certain~~amount ~~limitations.~~of ~~The term loan is payable in~~ $~~1.0 million installments each April 1 and October 1~~10,000 ~~beginning April 1, 2003 and in $0~~thousand.~~5 million~~ ~~installments each July 1 and December 31, until paid in full. Amounts repaid under the term loan increase the maximum availability under the revolving loan.~~ The ~~Facility~~funds ~~also~~received ~~provides~~as ~~for~~a ~~the~~cash ~~issuance of certain~~advance ~~letters~~were ofused ~~credit.~~to ~~The~~fund ~~terms of~~ the ~~Facility~~one-time ~~requires~~special ~~that~~cash ~~the Company~~dividend ~~maintain~~and ato ~~minimum availability~~ meet on-going ~~the~~working ~~revolving~~capital ~~line of credit of $2~~requirements.~~5 million.~~ As of ~~September~~December 3031, ~~2003~~ 2004, the Company’s ~~had~~borrowing ~~$3.9 million~~under ~~of availability on~~ the revolving ~~line~~ of credit~~. The amount of the available revolving credit~~ line ~~fluctuates~~was on$8,000 ~~a daily basis dependent upon the amount of Eligible Receivables and the amount of letters of credit outstanding and the amount of outstanding cash borrowings against the revolving credit facility~~thousand.

~~The~~As ~~Facility~~of ~~may be terminated on~~ December 2331, ~~2005~~2004, if the ~~Note~~Company ~~is not paid in full or~~had ~~refinanced~~$26,254 onthousand ~~terms~~of ~~acceptable~~revolving tocredit ~~Foothill,~~line ~~prior~~available ~~to October 31,~~under ~~2005.~~the ~~The Facility is collateralized by~~B ~~substantially all~~ of ~~the~~A ~~assets~~Credit ~~of the Company and its subsidiaries. The~~ Facility, ~~contains provisions that require the maintenance~~ of ~~certain~~which ~~financial~~$15,323 ~~ratios~~thousand ~~including~~was ~~minimum~~reserved ~~EBITDA~~for ~~levels,~~issued ~~minimum~~and ~~fixed~~outstanding ~~charge~~letters ~~coverage~~of ~~ratios,~~credit and ~~maximum annual capital expenditure levels. In addition~~$2,931 ~~under~~thousand ~~the Facility, the~~was ~~Company~~available isand ~~prohibited from paying non-intercompany cash dividends~~undrawn.

~~While~~On November 1, 2004, the ~~Note~~Company isand ~~subordinate~~Bank toof America ~~the~~entered ~~Facility,~~into a Letter of Credit and Reimbursement Agreement (the ~~loan~~“LOC and ~~security~~Reimbursement ~~agreement~~Agreement”) relating ~~does~~to ~~allow~~the ~~for~~outstanding ~~the~~tax ~~prepayment~~exempt ofbonds issued in 1998 ~~principal~~pursuant onto ~~both~~a loan agreement between the ~~Note~~Company and the California ~~Facility~~Economic ~~under~~Development ~~certain~~Financing Authority ~~conditions~~(“CEDFA”). ~~Under~~As of November 1, 2004, the outstanding ~~terms~~principal amount of the ~~loan~~bonds ~~and~~outstanding ~~security agreement,~~was if$14,000 ~~certain~~thousand. ~~conditions~~In ~~are~~accordance ~~met,~~with the ~~first~~terms ~~$15.0 million~~ of the LOC and ~~principal~~Reimbursement ~~prepayment~~Agreement, isBank toof beAmerica ~~applied~~has ~~equally~~issued an irrevocable direct pay letter of credit to the ~~outstanding~~trustee for the ~~principal~~bondholders in an amount of ~~the~~$14,161 ~~Facility’s~~thousand ~~term~~(the ~~loan~~“CEDFA LOC”) ~~and~~that replaced the ~~Note.~~previously ~~The~~existing irrevocable ~~next~~direct ~~$4.5 million~~pay letter of ~~principal~~credit ~~prepayment~~of isthe tosame beamount ~~applied~~issued by Wells ~~entirely~~Fargo toBank, ~~the~~N.A. ~~outstanding~~on ~~principal~~behalf of the ~~Note.~~Company, ~~The~~which ~~next~~was cancelled ~~principal~~simultaneously ~~prepayments~~with ~~will~~the ~~then~~issuance ~~either~~of bethe ~~applied~~CEDFA ~~equally~~LOC. In addition to the ~~outstanding~~ ~~principal~~issuance of the ~~Facility~~CEDFA ~~and~~LOC, to the ~~Note~~LOC orand Reimbursement ~~entirely~~Agreement torequire the ~~outstanding~~Company ~~principal~~to ofcall for redemption bonds in the ~~Note,~~principal ~~depending~~amount of $500 thousand on each of April 1 ~~certain~~and ~~conditions,~~October 1 ~~until~~commencing ~~the~~on ~~entire~~April 1, ~~$24~~2005.~~0 million~~ ofThe ~~the~~CEDFA ~~Note~~LOC ~~has~~was ~~been~~issued ~~repaid~~by inBank ~~full~~of America as part of the B of A Credit facility.

Note 6 7 — ~~Net~~Impairment ~~Income~~of ~~(Loss)~~Long-Lived ~~Per Share~~ Assets

~~Basic~~The ~~net~~Company ~~income~~owned a 69.6% equity interest in MercMed LLC (~~loss~~“MercMed”) ~~per~~, ~~share~~which iswas formed in 1998 for ~~computed~~the bypurpose ~~dividing~~of ~~net~~owning ~~income~~and ~~(loss) by~~operating an aircraft for the ~~weighted~~MercMed ~~average~~members. ~~number~~As ofa ~~common~~result ~~shares~~of ~~outstanding~~the ~~during~~age of the ~~period. Net~~MercMed ~~diluted~~aircraft, ~~income~~changes in ~~(loss) per~~Federal ~~share~~Aviation isAdministration ~~computed~~requirements byrestricting ~~dividing~~the ~~net~~altitude ~~income~~at ~~(loss) by~~which the ~~weighted~~MercMed ~~average~~aircraft ~~number~~can offly, ~~common~~the popularity ~~shares~~of fractional jet ownership versus outright aircraft ownership and ~~potential~~the ~~common~~technological ~~shares~~advancements ~~except~~in ~~for~~aircraft ~~amounts~~design and construction, it was determined that ~~are~~the current market value of ~~antidilutive.~~the ~~Potential~~MercMed ~~common~~aircraft ~~shares~~was ~~include~~below ~~stock~~the ~~options~~carrying ~~and shares~~value ~~resulting~~of ~~from~~the aircraft. During the ~~assumed~~first ~~conversion~~quarter of ~~subordinated~~fiscal 2005, the book ~~debentures~~value of the MercMed aircraft was adjusted to reflect the current market value as determined by the MercMed members, ~~when~~which was ~~dilutive~~determined to be $532 thousand. This adjustment to market value resulted in an asset impairment loss of $626 thousand.

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

~~Note~~MERCURY ~~7 —~~AIR ~~Segment~~GROUP, ~~Reporting~~INC. AND SUBSIDIARIES

~~The~~NOTES ~~Company~~TO ~~discloses~~CONSOLIDATED ~~segment information in~~FINANCIAL ~~accordance with SFAS No.~~STATEMENTS ~~131, “Disclosure About~~— (Continued) ~~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,~~

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.

~~Table~~Note of8 ~~Contents~~— Net Income (Loss) Per Share

~~MERCURY~~Basic ~~AIR~~net ~~GROUP,~~income ~~INC~~(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. ~~AND~~Diluted net income (loss) per share is computed by ~~SUBSIDIARIES~~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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued



		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	)

~~major~~Note ~~customers~~9 ~~and~~— ~~material~~Segment countries in which the entity holds assets and reports revenues. The operating segments reported below are the segments of the Company for which operating results are evaluated regularly by management in deciding how to allocate resources and in assessing performance. Intersegment sales are not significant. Reporting

The Company ~~operates~~discloses ~~and~~segment ~~reports~~information ~~its~~in accordance ~~activities~~with SFAS No. 131, “Disclosure About ~~through~~Segments ~~four~~of ~~principal~~an ~~units:~~Enterprise ~~1) Fuel~~and ~~Sales~~Related Information,” ~~2) Fixed~~which ~~Based~~requires ~~Operations~~companies to report selected segment information on a quarterly basis and to report certain entity-wide disclosures about products and services, ~~3) Cargo~~major ~~Operations~~customers and material ~~4) Government~~countries ~~Contract~~in ~~Services~~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.

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

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 ~~Gross margin is used as the measure of profit and~~ ~~loss for segment reporting purposes as it is viewed by key~~ ~~decision makers as the principal operating indicator in~~ measuring segment profitability. The key decision makers also view bad debt expense as an important measure of profit and loss. The predominant component of bad debt expense relates to Fuel Sales. Bad debt expense for Fuel Sales was approximately $326,000 and $293,000 for the quarters ended September 30, 2003 and 2002, respectively; total bad debt expense was $383,000 and $352,000 in the quarters ended September 2003 and 2002, respectively.

~~Note~~MERCURY ~~8 —~~AIR ~~Comprehensive~~GROUP, INC. AND ~~Income~~SUBSIDIARIES

~~Comprehensive~~NOTES ~~loss~~TO isCONSOLIDATED ~~summarized as follows:~~FINANCIAL STATEMENTS — (Continued)

	Three Months Ended
												Total
	September 30,
									Corporate			Continuing
	2003			2002
	MercFuel			Air Cargo			Maytag		and Other			Operations
Net loss	$	(302,000	)	$	(589,000	)
Quarter Ended December 31, 2004
Foreign currency translation adjustment		8,000			(39,000	)
Revenues	$	136,967		$	11,388		$	4,980	$	197		$	153,532
Comprehensive loss	$	(294,000	)	$	(628,000	)
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

~~Note~~Gross 9margin 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, ~~Related~~2004 ~~Party~~and 2003, respectively; total bad debt ~~Transactions~~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 ~~CFK Partners is a partnership consisting of three~~ ~~of the Company’s directors, one of whom also serves as the~~ ~~Company’s Chief Executive Officer and another who serves as~~ ~~Chairman of the Board. In addition, CFK Partners also owns approximately 28.4% of the Company’s outstanding common stock and 24% of the combined common and preferred stock.~~

11 MERCURY AIR GROUP, INC. AND SUBSIDIARIES

~~Table~~ NOTES ofTO ~~Contents~~CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~MERCURY~~Note ~~AIR~~10 ~~GROUP,~~— ~~INC.~~Comprehensive ~~AND SUBSIDIARIES~~ Income (Loss)

~~NOTES~~Comprehensive TOincome ~~CONSOLIDATED~~(loss) ~~FINANCIAL~~is summarized as ~~STATEMENTS — Continued~~follows:

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



	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	)

~~The~~Note ~~Company~~11 ~~and~~— ~~its~~Related ~~Chairman~~Party (collectively, the “Members”) each own an equity interest in MercMed LLC (“MercMed”) of 64.94% and 35.06%, respectively. Accordingly, MercMed has been included in the Company’s consolidated financial statements and the liability to the minority interest has also been reflected as of September 30, 2003. Minority Interest on the Company’s consolidated balance sheet represents the minority member’s equity in MercMed. MercMed was formed for the purpose of owning and operating an aircraft for the Members. In June 2003, the Members amended the MercMed Operating Agreement to amend each Member’s ownership interest from 50% for each Member to the ownership percentages previously noted. On March 27, 2003, MercMed obtained new financing for the aircraft which is a 15-year loan with the interest rate being fixed for the initial 36-month period. At the end of the initial 36-month period, the interest rate will be reviewed and fixed at the then Federal Home Loan Bank’s regular three-year interest rate plus 275 basis points. Each of the Members are guarantors of this note. Since the inception of the new loan and through September 30, 2003, MercMed is current on the payments due. The outstanding principal amount of the loan as of September 30, 2003 was $691,000. Transactions

~~The~~CFK ~~Company~~Partners ~~uses~~was a partnership consisting of three of the ~~services~~Company’s directors, one of whom also serves as the ~~legal~~Company’s ~~firm~~Chief Executive Officer, another who ~~McBreen~~served ~~and~~as ~~Kopko~~Chairman (of the ~~“Firm”)~~Board ~~for~~of ~~various~~Directors ~~general~~and the third who ~~corporate~~serves ~~legal~~as ~~matters.~~a ~~Mr. Frederick~~director H.and ~~Kopko,~~is ~~Jr.,~~the aCompany’s primary outside ~~partner~~legal ofcounsel. ~~the~~In ~~Firm~~July 2004, isafter athe ~~member~~retirement of Dr. Fagan as the Company’s Chairman of the Board of Directors, ~~and~~Dr. Fagan iswithdrew as a ~~partner~~member ~~with~~of CFK Partners. The remaining members of CFK Partners, ~~LLC.~~now ~~For~~known ~~the~~as ~~three~~CK Partners, ~~month~~are ~~periods~~the ~~ended~~Company’s ~~September 30,~~Chief ~~2003~~Executive Officer and ~~2002,~~Frederick ~~the~~H. ~~Company~~Kopko, Jr., ~~paid~~a member of the ~~Firm~~Company’s ~~$142,000~~Board ~~and~~of Directors. ~~$134~~As of December 31,~~000,~~ ~~respectively~~2004, ~~for~~CK Partners owned ~~legal~~approximately ~~services~~43% ~~rendered~~of the Company’s outstanding common stock.

~~Note~~Pursuant 10to the terms of Dr. —Fagan’s contract ~~Subsequent~~with the Company, upon Dr. Fagan’s retirement ~~Events~~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.

OnIn ~~October 28,~~January ~~2003~~2002, the Company ~~announced that~~sold ~~Allied had acquired~~ the ~~Company’s~~land ~~$24.0 million~~and ~~Senior~~office ~~Subordinated~~building ~~12%~~which ~~Note~~houses ~~from~~its J.corporate H.headquarters ~~Whitney~~to ~~Co. Mezzanine~~CFK ~~Fund~~Realty ~~(the~~Partners, LLC (“~~Whitney~~CFK ~~Note~~Realty”) ~~and~~for ~~that~~$4,200 thousand, ~~the~~consisting ~~Company~~of ~~and Allied~~$2,800 ~~had~~thousand ~~entered~~in ~~into~~cash and a ~~definitive~~note receivable ~~agreement~~of $1,400 ~~subject~~thousand. ~~to stockholders’~~The ~~approval,~~note ~~completion~~accrued ofinterest ~~due~~at ~~diligence and~~5% ~~regulatory~~and ~~agencies’~~contained ~~approvals~~provisions ~~and~~whereby ~~consents,~~CFK ~~for~~Realty ~~Allied~~could elect to ~~acquire~~extend ~~100% of~~ the ~~outstanding~~maturity ~~stock~~date ofin ~~Mercury~~one-year ~~Air~~increments ~~Centers,~~through ~~Inc~~December 31, 2004. ~~for~~The ~~$70~~note had an original maturity date of December ~~million~~31, 2002. ~~The~~In ~~actual~~early ~~cash~~December ~~proceeds~~2002 toand be2003, the Company received bynotification ~~the~~from ~~Company~~CFK isRealty ~~subject~~that it was exercising its right to extend the ~~establishment~~maturity date of anthe note for ~~escrow~~an ~~account~~additional ofone $8year period.~~3 million~~ ~~associated~~Concurrently with the sale, the ~~month~~Company also entered into a twenty-~~to-month~~year ~~terms~~lease of the ~~Air~~property for ~~Centers’~~a ~~FBO~~monthly ~~located~~rental atamount ~~the Atlanta~~of ~~Hartsfield~~approximately ~~International~~$37 ~~Airport~~thousand. During fiscal 2003, ~~reimbursement~~the Company expended $275 thousand for ~~certain~~leasehold ~~FBO~~improvements ~~capital~~on ~~investments~~its ~~made~~corporate byheadquarters. This amount is being amortized over the ~~Company,~~office ~~minimum~~lease ~~Air Centers~~term. ~~working~~CFK ~~capital~~Realty financed atthe ~~closing~~purchase ~~and~~of ~~other~~the ~~customary~~headquarters ~~terms~~through ~~and~~a $3,200 ~~conditions~~thousand loan. In ~~accordance~~July ~~with~~2004, ~~the~~CFK ~~terms~~Realty ofwas ~~the~~restructured ~~definitive~~whereby ~~agreement~~Dr. Fagan, ~~as amended,~~ the ~~FBO~~retired ~~Sale~~Chairman isof tothe ~~close~~Company’s onBoard ~~January 16~~of Directors, ~~2004~~became ~~but~~ the ~~closing~~sole ~~date~~member ~~can~~of beCFK ~~extended,~~Realty. atEffective ~~Allied’s~~July ~~discretion~~2004, toCFK ~~April 16,~~Realty ~~2004.~~is ~~The~~no ~~Company~~longer considered a related party ~~expects~~and ~~this~~the ~~transaction~~financial tostatements ~~close~~of ~~during~~CFK ~~its~~Realty ~~third~~are ~~quarter~~no oflonger ~~fiscal~~included ~~2004~~in the Company’s consolidated financial statements.

~~The~~On ~~Whitney~~November 10, ~~Note~~2004, asthe ~~amended~~Company, ~~included provisions~~upon ~~whereby~~authorization from the Company’s Board of Directors, entered ifinto ~~any~~an ~~amount~~amended oflease agreement with CFK Realty and amended the ~~principal~~terms onof the note receivable due from CFK Realty ~~Whitney~~(the “CFK Realty Note”). ~~remained~~The ~~outstanding~~amended asterms of ~~December~~the lease, which were effective retroactively to July 311, ~~2003~~2004, ~~would~~provide ~~issue~~for ~~warrants~~a toten-year ~~the~~lease ~~note~~with ~~holder~~CFK toRealty ~~purchase~~having 5%the ofright, after the ~~Company’s~~ ~~outstanding~~refinancing ~~common~~of ~~stock,~~its ~~exercisable~~existing ~~for~~loan ~~nominal~~secured by the office ~~consideration~~building, ~~and,~~to ifrequest the ~~amount~~Company ofto ~~principal~~vacate on the ~~Whitney~~facility at the ~~Note~~end ~~was~~of ~~greater~~five ~~than~~years ~~$12.0 million~~without asany ofadditional ~~December 31,~~obligation from the ~~2003,~~Company ~~would~~with ~~issue~~CFK ~~warrants~~Realty continuing to honor the ~~note~~terms ~~holder~~of toany sublease ~~purchase~~the ~~an additional~~Company 5%may ofhave arranged under the ~~Company’s~~McConnell Lease. ~~outstanding~~The ~~common~~monthly ~~stock,~~lease rate remains unchanged from the ~~exercisable~~original ~~for~~lease ~~nominal~~at ~~consideration,~~$37 ~~along~~thousand. ~~with~~The anCompany ~~additional~~also agreed to amend ~~note~~the interms of the ~~original~~CFK ~~principal~~Realty ~~amount~~Note ofto ~~$5.0 million.~~reduce Inthe principal amount ~~addition,~~of the ~~Whitney~~note ~~Note,~~to as$779 ~~amended~~thousand, ~~also~~from ~~provided~~the ~~that~~previous ~~beginning January~~

1214

~~Table~~ MERCURY ofAIR ~~Contents~~GROUP, INC. AND SUBSIDIARIES

~~MERCURY~~NOTES ~~AIR~~TO ~~GROUP,~~CONSOLIDATED ~~INC. AND~~FINANCIAL ~~SUBSIDIARIES~~STATEMENTS — (Continued)

~~NOTES~~principal TOamount ~~CONSOLIDATED~~of ~~FINANCIAL~~$1,400 thousand plus accrued ~~STATEMENTS~~interest of $179 thousand, at an interest rate of 4% —per annum. The CFK Realty Note is payable on December ~~Continued~~31, 2009.

~~2004~~The ~~and~~Company ~~continuing~~uses ~~through~~the ~~June~~services ~~2004,~~of the legal firm ~~interest~~McBreen ~~rate~~and ~~will~~Kopko ~~increase~~(the by“Firm”) 1%for ~~per~~various ~~annum~~general corporate ~~each~~legal ~~month~~matters. upMr. Frederick toH. aKopko, Jr., ~~maximum~~a partner of ~~18%~~the ~~per~~Firm, ~~annum.~~is ~~Allied,~~a inmember of the ~~new~~Company’s ~~promissory note~~Board ~~issued~~of inDirectors ~~replacement~~and is a member of ~~the~~CK ~~Whitney~~Partners. ~~Note~~For (the ~~“Allied~~six month ~~Note”)~~periods ended December 31, ~~has~~2004 ~~waived~~and 2003, the ~~penalty~~Company ~~provisions~~paid the ~~that~~Firm ~~were included~~$474 inthousand ~~the~~and ~~Whitney~~$481 ~~Note~~thousand, ~~however~~respectively, ~~beginning~~for legal ~~January~~services ~~2004 and~~rendered ~~continuing~~by ~~through~~the ~~June~~Firm. ~~2004,~~For the ~~interest~~three ~~rate~~month ~~will~~periods ~~increase~~ended byDecember 31, 1%2004 ~~per~~and ~~annum~~2003, ~~each~~the ~~month~~Company uppaid tothe aFirm $234 ~~maximum~~thousand ofand ~~18%~~$339 ~~per~~thousand, respectively, for legal ~~annum~~services rendered by the Firm.

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

AtOn ~~the~~April 12, ~~close of the FBO Sale~~2004, ~~the~~after ~~Company estimates~~receiving ~~gross sales proceeds of $73.1 million. The~~approval ~~Company~~from ~~intends to use these proceeds to: 1) prepay~~ the ~~outstanding~~ ~~principal~~Company’s ~~amount~~stockholders onat the ~~Senior Secured Term Loan of~~Annual ~~$10 million;~~Stockholders’ ~~2) repay~~meeting, ~~all outstanding cash advances on~~ the ~~Revolving~~Company ~~Line~~sold ~~of Credit; 3) pay~~ all ~~accrued~~of ~~interest, fees and expenses associated with~~ the ~~Senior Secured Credit~~ ~~Facility; 4) provide cash collateral for the~~ outstanding ~~Letters~~ ofcommon ~~Credit~~stock of ~~approximately~~Air ~~$16.0 million; 5) prepay~~Centers ~~the~~to ~~outstanding principal amount on the~~ Allied ~~Note;~~ ~~6) pay all accrued interest, fees and expenses associated~~ with the Company ~~Allied~~receiving ~~Note;~~total ~~7) establish~~consideration ~~an escrow account~~ for the ~~FBO~~sale ~~located at the Hartsfield Airport~~ in ~~the amount~~cash ~~of $8.3 million; 8) repay the outstanding~~at ~~principal~~closing ~~amount due on the Hambro Note~~ of $~~3.6 million; 9) repay~~76,349 ~~all~~thousand ~~accrued~~subject ~~interest~~to onadjustments ~~the~~for, ~~Hambro Note; and~~among ~~10) pay~~other ~~all commissions~~things, ~~fees~~Air ~~and~~Centers’ ~~expenses~~net ~~associated~~working ~~with the~~capital ~~FBO~~as ~~Sale. After settlement~~ of the ~~all of the obligations~~ ~~noted above, the Company estimates that the~~ FBO Sale ~~will~~Closing ~~result in~~Date ~~surplus~~and ~~cash~~the ~~proceeds~~distribution of ~~$4.0 million,~~funds offrom ~~which an estimated $1.5 million will be required to settle~~ the ~~Company’s~~Hartsfield ~~current~~Escrow ~~income tax obligation associated with the FBO Sale~~Account.

13 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.

~~Table~~ In addition to the final payment associated with the Closing Working Capital, Allied and Air Centers agreed to assign to the Company all of ~~Contents~~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.

~~Item~~ The 2.Company ~~Management’s~~reported ~~Discussion~~a ~~and~~gain ~~Analysis~~on the sale of discontinued ~~Financial~~operations, ~~Condition~~net ~~and~~of ~~Results~~income tax provision of $14 thousand, ~~Operations~~of $22 thousand in the second quarter of fiscal 2005.

~~Results~~The following are the results of ~~Operations — Comparison~~operations of Air ~~the~~Centers ~~Three~~for ~~Months~~the ~~ended September 30,~~six ~~2003~~month and ~~September~~three month periods ended December 3031, ~~2002~~2003:

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


	Six Months Ended			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	)

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

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

MERCURY AIR GROUP, INC. AND SUBSIDIARIES

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~(1)~~Note ~~Gross~~13 ~~margin~~— asCash used here and throughout Management’s Discussion includes certain selling, general and administrative costs which are charged directly to the operating units, but excludes depreciation and amortization expenses and selling, general and administrative expense.Dividend

~~Three~~On ~~Months~~October 6, ~~Ended~~2004, ~~September 30~~the Company announced that its Board of Directors declared a one-time special cash dividend totaling $17,500 ~~2003~~thousand, that would be payable on a ~~Compared~~pro rata basis to ~~September~~holders of record of its common stock as of the close of business on October 3018, ~~2002~~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.

~~Revenue~~Note ~~for~~14 ~~the~~— ~~Company~~Subsequent in the first quarter of fiscal 2004 was $101,013 thousand, which decreased by 6.4% from revenue of $107,895 thousand reported for the first quarter of fiscal 2003. The decrease in revenue is due to lower MercFuel revenue of $5,583 thousand. Gross margin increased by 12.9% to $6,715 thousand in the first quarter of fiscal 2004 from $5,950 thousand reported in the first quarter of fiscal 2003. The increase in Events

14 None

~~Table of Contents~~16

~~gross~~Item ~~margin~~2. ~~is due to improved performances at the Company~~Management’s ~~Air~~Discussion ~~Centers,~~and ~~Air~~Analysis ~~Cargo~~of ~~and~~Financial ~~Maytag~~Condition ~~Government Contract~~and ~~Services~~Results ~~Operations~~of ~~segments.~~ Operations

~~MercFuel,~~Overview — ~~the~~Mercury ~~Company’s~~Air ~~fuel sales business~~Group, ~~generated~~ ~~revenue~~Inc. ~~of $64,990 thousand in~~ (the ~~current~~ ~~period~~“Company”), a ~~decrease~~Delaware ~~of $5~~corporation,~~583 thousand~~ orwas ~~7.9%~~organized ~~from last~~in ~~year’s~~1956 ~~revenue~~and ofprovides ~~$70,573 thousand.~~a ~~The~~broad ~~decrease~~range ~~in revenue~~of ~~was~~services ~~primarily due~~ to ~~lower~~the ~~sales volume partially offset~~aviation byindustry ~~higher~~through ~~average~~three ~~fuel~~principal ~~sales~~operating ~~prices.~~units ~~Fuel~~which ~~sales~~are ~~volume was~~all ~~64.3 million~~wholly ~~gallons~~owned insubsidiaries ~~the first quarter~~ of ~~fiscal 2004, a decrease of 15.8 million gallons from~~ the ~~same~~Company: ~~period~~MercFuel, ofInc. ~~fiscal~~(“MercFuel”), ~~2003 resulting in~~ a ~~reduction~~Delaware incorporation, ~~sales~~Mercury ~~revenue of~~Air ~~$13.9 million. The decline in sales volume is due to National Airlines~~Cargo, Inc. (“~~National~~Air Cargo”), a ~~customer~~California ofcorporation, ~~MercFuel~~and ~~since~~Maytag ~~May~~Aircraft ~~1999~~Corporation (“Maytag”), ~~ceasing~~a ~~operations on November 6,~~Colorado ~~2002~~corporation. ~~Sales~~MercFuel’s ~~volume~~operations toconsist ~~National~~of in the ~~first~~sale ~~quarter~~and delivery of ~~fiscal 2003~~fuel, ~~was~~primarily ~~20.9 million~~aviation ~~gallons~~fuel, ~~resulting in revenue of $17.5 million. Excluding the sales volume~~ to ~~National~~domestic ~~from~~and ~~the~~international ~~sales~~commercial ~~volume~~airlines, infractional ~~the~~jet ~~first quarter of fiscal 2003~~ownership companies, ~~first quarter~~corporate ~~2004~~aviation ~~sales~~fleets ~~volume~~and ~~increased~~air ~~5.2 million~~cargo ~~gallons, or 8~~companies.8% Air ~~from~~Cargo’s ~~last~~operations ~~year.~~consist ~~The average sales price in the first quarter~~ of ~~fiscal~~cargo ~~2004 was $1.01 per gallon~~handling, ~~an increase of $0.129 per gallon from~~ the ~~same period~~ sale of ~~last~~cargo ~~year~~capacity ~~resulting~~on ~~in revenue~~other ~~increasing~~airlines ~~due~~(“Cargo ~~to higher average sales prices of~~Space ~~$8.3 million.~~Logistics”), ~~The~~and ~~higher~~general ~~average~~cargo sales ~~price~~agent ~~is due to higher worldwide petroleum prices~~services. ~~Revenues from the fuel sales~~Maytag ~~business~~is ~~represented~~a ~~64.3%~~provider of ~~the~~governmental ~~Company’s~~contract ~~total~~services ~~revenue~~performing inaircraft ~~the~~refueling ~~current~~and ~~period compared to 65.4% of revenue in the comparable prior year quarter. Gross margin from~~ fuel ~~sales~~storage ~~was $1~~operations,~~426 thousand~~ inbase ~~the~~operations support ~~current~~(“BOS”) ~~period compared with $1~~services,~~620 thousand~~ inair ~~the~~terminal ~~same~~and ~~period last year, of which~~ground ~~$0.2 million~~handling ~~was~~services ~~generated~~and ~~from~~weather ~~sales~~observation toand ~~National. The~~forecasting ~~decline~~services ~~in gross margin was~~ primarily ~~due~~for toagencies ~~National~~of ~~ceasing operations. The average gross margin per gallon sold in~~ the ~~first~~ ~~quarter~~government of ~~fiscal~~the ~~year 2004 was $0.0396 per gallon as~~United ~~compared~~States toof $0America.~~0347 for the same period last year.~~

~~The~~As ~~Company’s~~used ~~Air Centers business segment had revenue of $22,533 thousand~~ in ~~the~~this ~~first~~Quarterly ~~quarter~~Report ofon ~~fiscal year 2004~~Form 10-Q, athe ~~decrease~~term of“Company” ~~$1,293 thousand~~ or ~~5.4%~~ ~~from~~“Mercury” ~~last~~refers ~~year’s first quarter revenue of $23,826 thousand. The revenue decrease was mainly due~~ to ~~lower~~ ~~revenue~~Mercury ~~of $1.0 million in maintenance activities in the~~ Air ~~Center~~Group, ~~operations~~Inc. ~~The Air Centers’ aviation fuel~~and, ~~sales~~unless ~~volume in~~ the ~~first~~context ~~quarter~~otherwise ofrequires, ~~fiscal~~its ~~2004 was 7~~subsidiaries.~~8 million~~ ~~gallons with an average sales price of $1.91~~The ~~per gallon as compared to last year~~Company’s ~~first~~principal ~~quarter~~executive ~~sales volume~~offices ofare ~~8.8 million~~located ~~gallons~~at ~~with an average sales price~~5456 ofMcConnell ~~$1.70~~Avenue, ~~per~~Los ~~gallon. The higher average sales price was mainly due to higher worldwide petroleum prices. Gross margin increased by $231 thousand or 7.8% in the current period to $3~~Angeles,~~204 thousand~~ ~~from $2~~California,~~973 thousand~~ ~~last~~90066 ~~year~~and ~~due to~~its ~~the~~telephone ~~Company’s~~number ~~efforts~~is ~~to reduce operating expenses~~(310) 827-2737.

Government Regulation — The Company’s ~~Air~~is subject ~~Cargo~~to ~~operations~~the ~~had~~regulatory and reporting requirements of the ~~revenue~~Sarbanes-Oxley Act of ~~$8,894 thousand~~2002. Management believes it is in material ~~the~~compliance ~~first~~with ~~quarter~~the provisions of ~~fiscal~~this Act at this ~~2004,~~time. anManagement ~~increase~~does ofanticipate, $1however,~~604 thousand~~ orthat ~~22%~~current ~~from~~and future compliance with such provisions, including the ~~revenue~~Section 404 certification of ~~$7,290 thousand~~internal incontrols ~~the~~by management ~~first~~and ~~quarter~~attestation ofby ~~fiscal~~the Company’s independent ~~2003.~~auditors, ~~The~~will ~~increase~~result in ~~revenue~~significant isincreases ~~mainly~~in ~~due~~consulting, audit and legal fees and overhead expenses related to ~~improvements~~software, documentation, intesting, remediation, system enhancements, hiring ~~cargo~~new ~~handling~~personnel ofand $0administrative time.~~5 million,~~ ~~cargo~~The ~~management~~total cost of the ~~$0.2 million~~Company’s ~~and~~compliance ~~cargo~~with ~~marketing~~the ~~services~~requirements of the ~~$0.9 million.~~Sarbanes-Oxley ~~Gross~~Act ~~margin~~is ~~from~~uncertain, ~~Air~~although ~~Cargo~~the ~~operation~~most incostly provisions will be related to the Company’s first ~~current~~Section 404 ~~period~~compliance ~~increased~~year byending ~~$369~~June ~~thousand~~30, ~~or 91~~2006.3% However, tomanagement estimates such compliance costs could exceed $~~773~~2.5 ~~thousand~~million ~~from~~during ~~$404~~the eighteen months leading up to June ~~thousand~~30, in2006. ~~the~~Management ~~year~~further ~~ago~~believes that ~~period~~significant, ~~due~~additional tocosts ~~higher~~will ~~volume~~be incurred for ~~cargo~~each succeeding ~~management~~year thereafter. Such compliance cost estimates are incremental to current general and ~~Mercury~~administrative expenses and ~~World~~do ~~Cargo~~not ~~operations~~include ~~resulting~~the inopportunity ~~higher~~costs ~~gross~~associated ~~margin~~with ~~of $0.2 million~~the time and effort of ~~$0.2 million~~current employees and management, ~~respectively~~which is expected to be significant.

~~The~~Results ~~Company’s Government Contract Services segment had revenue~~ of ~~$5,826~~Operations ~~thousand~~— inComparison of the ~~first~~three ~~quarter of~~month ~~fiscal~~periods ~~2004,~~ended ~~a decrease of $380~~December ~~thousand~~31, or2004 ~~6.1% from~~and ~~revenue of $6,206~~December ~~thousand~~31, ~~in the first quarter of fiscal~~ 2003. ~~The revenue decrease is primarily due to the decreased revenue from the Weather Data Services contracts in the amount of $0.3 million~~ and ~~the~~comparison ~~loss~~ of ~~one refueling contract, which generated revenue of $0.3 million last year. Gross margin in~~ the ~~current~~six ~~period~~month ~~increased by $359 thousand or~~periods ~~37.7%~~ended ~~to $1,312~~December ~~thousand~~31, ~~from~~2004 ~~$953 thousand last year due to higher margin on the Kuwait Air Terminal~~ and ~~the Patrick Base Operation contracts~~December 31, ~~which had a reserve for legal settlements of $0.3 million in the first quarter of fiscal~~ 2003.

~~Selling,~~The ~~general~~following ~~and~~tables ~~administrative~~set ~~expenses in the current quarter decreased by $340 thousand~~forth, orfor ~~13.0%, to~~the $2periods indicated,~~275 thousand~~ ~~from~~the ~~$2,615 thousand~~revenues inand ~~last year’s~~gross ~~quarter~~margin ~~primarily~~for ~~due~~each ~~to $0.3 million associated with the extension~~ of ~~certain stock options and~~the ~~$0.3 million~~Company’s ~~associated~~three ~~with~~operating aunits ~~reserve~~included ~~for~~in ~~legal~~continuing ~~settlements~~operations, ~~included~~as inwell ~~the~~as ~~first~~selected ~~quarter~~other offinancial ~~fiscal~~statement ~~2003~~data.

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



	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	%

1517


				% 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	%

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



	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	)%

~~Interest~~(1) ~~expense~~Gross ~~and~~margin ~~other~~as ~~was $2,381 thousand~~used inhere ~~the~~and ~~first~~throughout ~~quarter~~Management’s ofDiscussion ~~fiscal~~includes ~~2004,~~certain ~~an increase of $1~~selling,~~049 thousand~~ ~~from~~general ~~the~~and ~~same~~administrative ~~period~~costs ~~last~~which ~~year. The~~are ~~increase~~charged ~~was~~directly ~~primarily due~~ to the ~~accrual~~operating ~~in the first quarter of fiscal 2004 of $0.9 million for the premium relating to the senior subordinated note which would have been payable in the event the note was not prepaid prior to December 31~~units, ~~2003.~~but Asexcludes ~~noted~~depreciation ~~in “Note 10 —~~and ~~Subsequent~~amortization ~~Events,”~~expenses ~~on October 28,~~and ~~2003~~selling, ~~the~~general ~~Company announced that Allied had acquired the senior subordinated note from J.H. Whitney~~ and ~~waived~~ ~~many~~administrative ~~of the premiums that would have been due in the event that the note was not prepaid by December 31, 2003~~expenses.

~~The~~Three ~~Company~~Months ~~wrote~~Ended ~~off~~December 31, ~~capitalized financing costs~~2004 inCompared ~~the~~to ~~first~~December 31, ~~quarter of fiscal~~ 2003 ~~associated with the~~ ~~Company’s debt restructuring in the amount of~~ ~~$500 thousand.~~

The ~~effective~~Company ~~income~~reported ~~tax~~a ~~rate~~net inloss ~~the~~from ~~first~~continuing ~~quarter~~operations of ~~fiscal~~$212 ~~year~~thousand ~~2004~~or ~~was 39.~~$0%.08 per ~~compared~~basic toand ~~34.5%~~diluted share in the ~~same~~ ~~period~~second ~~last~~quarter ~~year.~~of ~~The~~fiscal ~~lower~~2005, ~~effective~~as ~~income~~compared ~~tax~~to ~~rate in~~a ~~the~~loss ~~prior~~from ~~period~~continuing isoperations, ~~due~~net toof ~~certain~~taxes, ~~non-deductible~~reported ~~expenses~~for ~~and a~~the ~~lower~~same ~~effective~~period ~~state~~last ~~income~~year ~~tax~~of ~~benefit~~$1,495 ~~rate~~thousand, or $0.47 per basic and diluted share. For the

18 ~~Liquidity and Capital Resources~~

Assecond quarter of ~~September 30,~~fiscal ~~2003~~2005, the Company’s ~~cash~~reported ~~and~~a ~~cash~~net ~~equivalents~~loss ~~were~~of $3190 thousand, or $0.507 ~~million~~per basic and diluted share, anwhich ~~increase~~included a gain on sale of discontinued operations, net of taxes, of $22 thousand, or $0.701 ~~million~~per basic asand ~~compared~~diluted toshare. For the second quarter of fiscal 2004, the Company reported a ~~decrease~~net loss of $1,517 thousand, or $0.648 ~~million~~per basic and diluted share, which included a loss ~~during~~from ~~last~~discontinued ~~year’s~~operations, ~~first~~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.

~~Cash~~MercFuel, ~~provided by operating activities for~~ the ~~three~~ ~~month~~Company’s ~~period~~aviation ~~ended~~fuel ~~September 30~~sales business, ~~2003~~generated ~~was $2.2 million~~revenue ~~as compared to cash used for operating activities~~ of $~~3.7 million~~136,967 thousand in the ~~first~~ second quarter of fiscal ~~2003.~~ ~~The~~2005 ~~change~~on insales ~~operating~~volume ~~assets~~of ~~and~~82,150 ~~liabilities~~thousand gallons, ~~resulted~~as ~~in an~~compared ~~increase~~to revenue of $~~0.1~~74,901 asthousand ~~compared~~on tosales volume aof ~~decrease~~70,844 ~~of $6.2 million~~thousand gallons in the ~~first~~second quarter of fiscal ~~2003~~2004. ~~which reflects~~Following is a ~~payment~~comparison of ~~$4.5 million~~MercFuel’s ~~for income taxes~~sales ~~primarily~~information ~~due~~for to the ~~sale~~second quarter of ~~the~~fiscal ~~Bedford~~2005 ~~FBO~~and ~~late in fiscal 2002.~~2004, respectively:

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



		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

OnRevenue ~~December 30,~~for ~~2002~~MercFuel’s commercial segment increased $44,693 thousand in the ~~Company~~second ~~entered~~quarter of fiscal 2005 ~~into~~to a$104,854 ~~loan~~thousand ~~and~~on ~~security~~sales ~~agreement~~volume ~~with~~of ~~Foothill~~68,736 ~~Capital~~thousand gallons. ~~Corporation~~The ~~(“Foothill”),~~increased ~~now~~revenue ~~known~~for asthe ~~Wells~~commercial ~~Fargo~~segment is due to ~~Foothill,~~higher aaverage ~~division~~petroleum product prices resulting from concerns of ~~Wells~~oil ~~Fargo~~supply ~~Bank~~disruptions (due to general tension in the Middle ~~“Facility”)~~East, ~~refinancing~~from ~~its~~production ~~senior~~control ~~collateralized~~by OPEC and from increased ~~credit~~worldwide ~~facilities~~demand for apetroleum ~~five-year~~products ~~term,~~due asto ~~agent~~an ~~for~~improving worldwide ~~the~~economy. ~~lenders~~MercFuel’s commercial segment’s ~~party~~average ~~thereto.~~sales Inprice ~~addition,~~in the ~~Company~~second ~~and~~quarter ~~J.H.~~of ~~Whitney~~fiscal Co2005 increased 57.3% over the second quarter of fiscal 2004’s ~~Mezzanine~~average ~~Fund~~sales ~~entered~~price. ~~into~~The ~~agreements~~increased ~~amending~~average sales price in the second ~~terms~~quarter of fiscal 2005, as compared to the second quarter ~~subordinated~~of ~~note~~fiscal (2004, represents increased revenue of approximately $38,207 thousand. MercFuel’s commercial sales volume increased in the ~~“Whitney~~second ~~Note”)~~quarter of fiscal 2005 to 68,736 thousand ~~which~~gallons, ~~will~~an increase of 6,689 thousand gallons, or ~~mature~~10.8%, onfrom ~~December 31~~MercFuel’s second quarter of fiscal 2004’s commercial sales volume of 62,047 ~~2005~~thousand gallons. The increased ~~initial~~sales ~~funding~~volume ~~from~~in the ~~facility~~ ~~and~~second ~~the~~quarter ~~amendments~~of fiscal 2005, as compared to the ~~subordinated~~second ~~note~~quarter ~~were~~of fiscal 2004, represents ~~completed~~increased onrevenue ~~December 31~~of approximately $6,486 ~~2002~~thousand.

~~The~~Revenue ~~Company~~for MercFuel’s ~~senior~~corporate/fractional jet ~~secured~~ownership ~~credit~~segment ~~facility (“Facility”)~~was ~~consists~~$32,113 ofthousand upon tosales ~~$42.5 million~~volume inof ~~revolving~~13,414 ~~and~~thousand ~~term~~gallons ~~loans.~~in ~~The~~the ~~term~~second ~~loan~~quarter isof ~~currently~~fiscal ~~for~~2005, an ~~amount~~increase ~~equal~~of to $~~11.0 million~~17,373 ~~while~~thousand, ~~the~~or ~~revolving~~117.9%, ~~loan~~and is4,617 thousand ~~for~~gallons, anor ~~amount~~52.5%, ~~not~~from tothe ~~exceed~~second ~~85%~~quarter of ~~Eligible~~fiscal ~~Accounts Receivable~~2004’s ~~(as~~revenue ~~defined~~of ~~in the loan agreement)~~$14,740 ~~subject~~thousand toon ~~certain limitations.~~sales ~~The~~volume ~~term~~of ~~loan is payable in $1.0 million installments each April 1 and October 1~~8,797 ~~beginning~~thousand ~~April 1,~~gallons. ~~2003~~The ~~and~~increase in ~~$0.5 million~~sales ~~installments~~revenue ~~each July 1~~is ~~and~~due ~~December 31,~~to ~~until~~the ~~paid~~increase in ~~full. Amounts~~ ~~repaid~~worldwide ~~under~~petroleum ~~the~~product ~~term~~prices, ~~loan~~increased ~~increase~~use ~~the~~of ~~maximum availability~~private ~~under~~aircraft ~~the~~for ~~revolving~~both ~~loan.~~business ~~The~~and ~~Facility~~personal ~~also~~travel ~~provides for the~~and ~~issuance~~MercFuel’s ofstrategic ~~certain~~focus ~~letters~~on ofthis ~~credit~~business segment. The ~~terms of the Facility~~ ~~require~~average ~~that~~sales ~~the~~price ~~Company~~for ~~maintain~~aviation ajet ~~minimum~~fuel ~~availability~~in on the ~~revolving~~corporate/fractional ~~line~~jet ofownership ~~credit~~segment ofin ~~$2.5 million.~~the Assecond ofquarter ~~September 30,~~of ~~2003,~~fiscal ~~the~~2005 ~~Company~~increased ~~had $3~~42.9 ~~million~~% ~~of availability~~as oncompared to the ~~revolving~~second ~~line~~ quarter of ~~credit.~~fiscal ~~The~~2004 ~~amount~~equating ~~of available~~to ~~revolving~~increased ~~credit~~revenue ~~line~~of ~~fluctuates on a daily basis~~approximately ~~dependent~~$9,637 ~~upon~~thousand. ~~the~~The ~~amount~~increased ofsales ~~Eligible~~volume ~~Receivables,~~equates ~~the~~to ~~amount of~~an ~~letters~~increase ofin ~~credit~~revenue ~~outstanding and the amount~~ of ~~outstanding~~approximately ~~cash borrowings~~$7,736 ~~against the revolving credit facility~~thousand.

1619

~~Table~~ MercFuel’s cost of ~~Contents~~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.

~~The~~Air ~~Facility~~Cargo’s ~~may~~revenue bewas ~~terminated on December 23~~$11,388 ~~2005,~~thousand if in the ~~Whitney~~second ~~Note~~quarter isof ~~not~~fiscal ~~paid in full or refinanced~~2005, onan ~~terms~~increase ~~acceptable~~of to$705 ~~Foothill~~thousand, ~~prior to~~ ~~October 31,~~or ~~2005~~6.6%, ~~The~~from ~~Facility~~the issecond ~~collateralized~~quarter ~~by substantially all~~ of ~~the~~fiscal ~~assets~~2004 ofrevenue ~~the Company and its~~of ~~subsidiaries.~~$10,683 ~~The~~thousand ~~Facility~~resulting ~~contains~~in ~~provisions~~gross ~~that~~margin ~~require the maintenance~~ of ~~certain~~$1,433 ~~financial~~thousand ~~ratios including minimum EBITDA~~in ~~levels,~~the ~~minimum~~second ~~fixed~~quarter ~~charge~~of ~~coverage~~fiscal ~~ratios~~2005, ~~and~~an ~~maximum~~increase ~~annual capital~~of ~~expenditure~~$910 ~~levels. In addition, under the Facility, the~~thousand ~~Company~~from islast ~~prohibited~~year’s ~~from~~gross ~~paying~~margin ~~non-intercompany~~of ~~cash dividends~~$523 thousand.

The amended Whitney Note is in the form of a $24.0 million Senior Subordinated 12% Note (the “Note”) with detachable warrants to purchase 251,563 shares of the Company’s common stock exercisable through September 9, 2006 at $6.10 per share as adjusted for the one-for-two stock split in July 2003. The warrant exercise price was reduced from $11.0 per share. The Note is collateralized by the Company’s assets, subordinate to Foothill’s interest. Warrants to purchase an additional 5% of the Company’s common stock, exercisable for nominal consideration, will be issuable if the principal amount of the Note is not prepaid by December 31, 2003. Warrants to purchase a second 5% of the Company’s common stock, exercisable for nominal consideration, along with an additional note in the original principal amount of $5 million must also be issued if the outstanding principal amount of the Note is greater than $12 million after December 31, 2003. However, on October 28, 2003 the Company announced that Allied had acquired the Note from Whitney and waived the provisions for the additional warrants equivalent to 10% of the Company’s outstanding common stock and the additional $5 million note. Beginning January 2004 and continuing through June 2004, the interest rate will increase by 1% per annum each month up to a maximum rate of 18%. The amended note contains similar covenants as the original Note, including covenants that, among other matters, limit senior indebtedness, the payment of dividends, and the disposition of assets. The revised covenants also include minimum EBITDA requirements and capital expenditure limitations.



			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

OnThe ~~October 28,~~cargo ~~2003,~~handling ~~the~~segment ~~Company~~reported ~~also~~revenue of ~~announced~~$7,675 ~~the~~thousand ~~FBO~~in ~~Sale,~~the ~~for~~second ~~which~~quarter ~~closing~~of ~~is,~~fiscal ~~among other things~~2005, ~~contingent on: 1) stockholder approval; 2) the~~an ~~completion~~increase of ~~due~~$1,006 ~~diligence;~~thousand, ~~and~~or ~~3) regulatory agencies’ approvals and consents~~15.1%, ~~The proceeds~~ from the ~~FBO Sale~~second ~~are subject to the establishment~~ quarter of anfiscal ~~escrow~~2004 ~~account~~revenue ~~in the amount~~ of $86,669 thousand.~~3 million~~ toCargo ~~be distributed at the earlier~~handling’s ofgross ~~the~~margin ~~award of a long term lease to Allied for the FBO at the Hartsfield Airport or~~ in ~~five equal annual installment payments starting at~~ the ~~first~~second ~~anniversary~~quarter ~~date~~ of ~~the~~fiscal ~~close~~2005 ofwas ~~the FBO~~$1,118 ~~Sale~~thousand, ifan ~~the~~increase ~~Air~~of ~~Centers’~~$424 ~~lease for the Hartsfield FBO is not terminated earlier~~thousand, ~~reimbursement~~or ~~for certain FBO capital expenditures made by the Company~~61.1%, ~~minimum~~from ~~working capital~~the ~~amounts~~second atquarter ~~closing~~of ~~and~~fiscal ~~other~~2004 ~~customary~~gross ~~terms~~margin ~~and~~of ~~conditions~~$694 thousand. The ~~Company~~improved ~~has~~results ~~received~~are ~~consent~~mainly ~~for~~due ~~the~~to ~~FBO~~increased ~~Sale~~cargo ~~from its Senior~~handling ~~Lenders.~~volume Inas ~~accordance~~a ~~with~~result ~~the terms~~ of ~~the~~an ~~definitive agreement,~~improved asworldwide ~~amended,~~economy ~~the~~and ~~FBO Sale is to close on~~Air ~~January 16, 2004 but the closing date can be extended, at Allied~~Cargo’s ~~discretion,~~focus toon ~~April 16,~~cost ~~2004~~control. ~~The Company~~ ~~expects the FBO Sale to close in the Company’s third~~ ~~quarter of fiscal 2004.~~

OnThe ~~December 5,~~cargo ~~2003,~~logistics ~~the~~services ~~Company~~segment ~~and its~~reported ~~lenders~~revenue ~~under~~of ~~the~~$2,448 ~~Senior~~thousand ~~Secured~~in ~~Credit Facility executed~~ the ~~Fifth~~ ~~Amendment~~second toquarter ~~the~~of ~~Loan~~fiscal ~~and Security Agreement and Forebearance Agreement (the “Forebearance Agreement”). Among other things~~2005, ~~the Company requested the lenders and the~~ ~~lenders~~a ~~agreed~~decrease toof ~~forebear~~$373 thousand from ~~exercising their rights and remedies under~~ the ~~Senior~~second ~~Secured~~quarter ~~Credit~~of ~~Facility for the~~fiscal ~~following~~2004 ~~events~~revenue of ~~default~~$2,821 asthousand. ~~defined~~The indecreased ~~the~~revenue ~~Loan~~in ~~and Security Agreement: (1)~~ the ~~Company’s failure to deliver its~~ ~~annual~~second ~~audited~~quarter ~~financial~~of ~~statements for the~~ fiscal ~~year~~2005 ~~2003 within~~is ~~the~~mainly ~~prescribed~~due ~~time-frame~~to ~~allowed; (2) the formation~~decreased ofbusiness aactivity ~~subsidiary,~~associated ~~Mercury~~with Air ~~Center —~~Cargo’s ~~Long~~Mercury ~~Beach,~~World ~~without~~Cargo ~~the~~(“MWC”) ~~prior~~operation. ~~consent~~Cargo oflogistics ~~the lenders; (3) the~~services ~~Company~~segment’s ~~failure~~gross tomargin ~~deliver~~in ~~supplemental~~the ~~schedules~~second toquarter ~~the J.~~of H.fiscal ~~Whitney~~2005 increased as$152 ~~required~~thousand ~~under~~from the ~~terms~~second quarter of ~~the~~fiscal 2004 to $~~24 million~~669 ~~Senior Secured 12% Note~~thousand. The ~~Forebearance Agreement~~increased ~~states~~gross ~~that~~margin ~~the~~is ~~lenders~~due ~~agree, for a limited time,~~ to ~~forebear~~ ~~from exercising their rights and remedies under~~ the ~~Senior~~increased ~~Secured~~business ~~Credit~~activity ~~Facility~~associated with ~~respect~~various ~~to the events of~~airline ~~default~~management ~~noted above~~contracts. ~~The Company is currently in compliance with~~ ~~the terms and conditions of the Forebearance Agreement.~~

OnThe ~~December 12,~~cargo ~~2003,~~general ~~the~~sales ~~Company~~agent ~~entered~~(GSA) services ~~into~~segment areported ~~settlement~~revenue ~~agreement~~of ~~(the~~$1,265 ~~“Hambro~~thousand ~~Settlement”)~~in the second ~~relating~~quarter toof ~~litigation~~fiscal ~~with~~2005, Jan Oincrease ~~Hambro~~of ~~Capital~~$72 ~~Management~~thousand ~~and~~from the ~~certain~~second quarter of ~~its~~fiscal ~~affiliates~~2004 ~~and~~revenue ~~private~~of ~~clients~~$1,193 ~~(“J O~~thousand. The ~~Hambro”)~~GSA ~~whereby~~services’ ~~the~~gross ~~Company~~margin ~~issued~~in ~~three~~the ~~promissory~~second ~~notes~~quarter of fiscal ~~for~~2005 anwas ~~aggregate~~$45 ~~principle~~thousand, ~~amount~~an increase of $~~3,586,000~~112 (thousand from the ~~“Hambro~~second ~~Notes”)~~quarter inof ~~exchange~~fiscal ~~for~~2004 ~~the~~loss ~~following,~~of ~~among other~~$67 ~~things:~~thousand. ~~(1)~~ The ~~release~~increase in ofGSA’s ~~certain~~gross ~~claims~~margin byis ~~J O Hambro;~~due ~~(2) the~~to ~~Company~~Air Cargo’s ~~agreement~~focus ~~to dismiss~~on ~~litigation~~cost ~~against J O Hambro;~~control.

17 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.

~~Table of Contents~~20

~~(3) the~~Maytag ~~Company’s~~reported ~~agreement~~revenue ~~not to institute certain litigation against J O Hambro and certain other parties; (4) reimbursement~~ of ~~certain costs associated with the pending litigation and the defense preparation for anticipated litigation between the parties; and (5) the purchase of 343~~$4,~~600~~980 ~~shares~~thousand ~~of the Company’s common stock~~ in ~~exchange for~~ the ~~Hambro Notes. The Hambro Notes:~~ ~~1) are~~second ~~subordinated~~quarter ~~to the Senior Secured Credit Facility and to the Senior Subordinated Note; 2) are due on the earlier~~ of ~~(a) March 31,~~fiscal ~~2006~~2005, ~~provided~~a ~~that~~reduction ifof ~~the Senior~~$935 ~~Secured~~thousand ~~Credit Facility Matures on December 31, 2007~~from ~~then such date shall be March 31, 2008 and (b)~~ the ~~ninetieth~~ ~~day~~second ~~following~~quarter ~~payment in full~~ of ~~the~~fiscal ~~Senior~~2004 ~~Secured Credit~~revenue ~~Facility and the termination~~ of ~~commitments~~$5,915 ~~for the~~thousand. ~~Senior~~Maytag’s ~~Secured~~second ~~Lender~~quarter toof ~~provide~~fiscal ~~financing~~2005 ~~under~~gross ~~the~~margin ~~Senior~~was ~~Secured~~$1,218 ~~Credit Facility; and 3) bear and accrue interest at the rate of 12% per annum commencing on December 31~~thousand, ~~2003 but~~a ~~will~~decrease ~~increase to 16% per annum for any amount~~ of ~~unpaid principal~~$213 ~~after~~thousand ~~June 30,~~from ~~2004. During~~ the second quarter of fiscal 2004, ~~the~~gross ~~Company~~margin ~~will~~of ~~recognize as expense~~ $1~~.8 million~~,431 ~~which represents the consideration paid to J~~thousand.~~O. Hambro in excess of the market value of such shares at that~~ ~~time.~~

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



			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 ~~Company~~decrease isin ~~currently~~Maytag’s ~~evaluating~~revenue ~~new~~is ~~credit facilities~~due to the ~~support~~non-renewal of one refueling contract in the ~~Company’s~~first ~~expansion~~quarter of fiscal 2005 and the non-renewal of ~~its~~one refueling contract and ~~remaining~~one ~~three~~BOS ~~business~~contract ~~lines~~during ~~and~~fiscal to2004. ~~support~~The ~~the~~decrease ~~Company~~of Maytag’s ~~Letters~~ gross margin in the second quarter of ~~Credit~~fiscal ~~requirements~~2005 as ~~thereby~~compared ~~releasing~~to the ~~cash collateral~~second quarter of ~~approximately~~fiscal ~~$16 million~~2004 is due to bea retroactive ~~used~~wage ~~for~~increase on a government BOS sub-contract in ~~working~~the ~~capital~~second ~~requirements~~quarter of fiscal 2004 and ~~general~~the ~~corporate~~non-renewal ~~purposes~~of contracts.

~~Critical~~Bad ~~Accounting~~debt ~~Policies~~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.

~~Management’s~~Selling, ~~beliefs~~general ~~regarding~~and ~~critical~~administrative ~~accounting~~(“G&A”) ~~policies~~expenses ~~have~~in ~~not~~the ~~changed~~second ~~significantly~~quarter of fiscal 2005 amounted to $4,317 thousand, an increase of $1,554 thousand or 56.2% from ~~those~~the second quarter of fiscal 2004 expenses of ~~discussed~~$2,763 thousand. The increase in ~~Item 7~~G&A ofexpenses 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’s ~~Annual~~incurs ~~Report~~increased onlegal fees associated with the ~~Form 10-K~~Signature ~~for~~lawsuit and due to the ~~fiscal~~newly ~~year~~effective ~~ended~~internal control ~~June 30,~~and ~~2003~~other requirements of the Sarbanes-Oxley Act of 2002. See “Government Regulations” above.

~~Item~~ Depreciation 3.and ~~Quantitative~~amortization ~~and~~expense ~~Qualitative~~from continuing ~~Disclosure~~operations ~~About~~was ~~Market~~$619 ~~Risk~~thousand in the current period as compared to $713 thousand last year.

~~There~~Interest ~~has~~and ~~been~~other noexpense ~~material~~from ~~change~~continuing operations ~~during~~in the ~~quarter~~ ~~ended~~current ~~September 30~~period was $426 thousand, ~~2003~~an increase of $191 thousand from ~~the~~last ~~disclosures~~year’s interest and other ~~regarding~~expense ~~market~~from ~~risk~~continuing ~~presented~~operations of $235 thousand. The increase in ~~the~~interest ~~Company’s~~and ~~Annual~~other expense is mainly due to the ~~Report~~recording of the loss on ~~Form 10-K~~disposal ~~for~~of ~~the~~assets ~~fiscal~~of ~~year~~$114 ~~ended~~thousand ~~June 30,~~in ~~2003~~the second quarter of fiscal 2005.

~~Item~~ The 4Company recognized settlement expense related to J.O. ~~Controls~~Hambro ~~and~~of ~~Procedures~~$1,799 thousand in the second quarter of fiscal 2004. See Exhibit 10.34 of this Form 10-Q.

~~Evaluation~~The effective income tax rate in the second quarter of ~~Disclosure~~fiscal ~~Controls~~year ~~and~~2005 was 27.6% compared to 13.5% in the ~~Procedures~~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.

~~Based~~The onreduction ~~evaluations~~in asretained ofearnings ~~September 30, 2003,~~from ~~our principal executive officer and principal financial~~fiscal ~~officer,~~year ~~with~~ending ~~the participation of our management team~~June 30, ~~have concluded~~2004 ~~that~~was ~~our~~primarily ~~disclosure~~due ~~controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) are effective~~ to ~~ensure~~payment ~~that~~of ~~information required to be disclosed by us in reports that we file or submit under~~ the ~~Securities~~$17,500 ~~Exchange~~thousand ~~Act~~dividend ison ~~recorded~~November 5, ~~processed,~~ ~~summarized~~2004. ~~and reported within the time periods~~See ~~specified in the rules and forms of the SEC~~Note 13.

18 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.

~~Table of Contents~~21

~~Changes~~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 ~~Internal~~the ~~Controls~~Company experiencing longer collection terms, which will place additional financial burden on the Company, or higher level of uncollectible accounts.

~~There~~Six ~~were~~Months noEnded ~~significant~~December 31, ~~changes in our internal~~2004 ~~controls~~Compared ~~or in other factors that could significantly affect these internal controls subsequent~~ to ~~the date of their most recent evaluation~~December 31, ~~including any corrective actions with regard~~2003 ~~to significant deficiencies and material weaknesses.~~

~~Forward-Looking~~The ~~Statements~~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.

~~Statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements. In addition~~MercFuel, ~~Mercury,~~the from time-to-time, makes forward-looking statements concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting MercuryCompany’s ~~best~~aviation ~~judgment~~fuel ~~based upon~~sales ~~current~~business, ~~information~~generated ~~and~~revenue ~~involve a number~~ of ~~risks and uncertainties~~$245,771 ~~and~~thousand ~~there~~in ~~can~~the ~~be no assurance that other factors~~first ~~will~~six ~~not~~months ~~affect the accuracy~~ of ~~such~~fiscal ~~forward-looking~~2005 ~~statements. While~~on itsales isvolume ~~impossible~~of ~~to identify all such factors~~156,579 ~~factors~~thousand ~~which~~gallons, ~~could~~as ~~cause~~compared ~~actual results~~ to ~~differ~~revenue ~~materially~~of ~~from those estimated by Mercury include~~$139,890 ~~but~~thousand ~~are~~on ~~not~~sales volume ~~limited~~of to135,114 ~~risks associated~~thousand ~~with~~gallons ~~acquisitions,~~in the ~~financial~~first ~~condition~~six ~~of customers,~~months ~~non-renewal~~ of ~~contracts, government regulation, as~~ ~~well~~fiscal as2004. ~~operating~~Following ~~risks,~~is ~~general~~a ~~conditions~~comparison inof ~~the~~MercFuel’s ~~economy and~~sales ~~capital~~information ~~markets,~~for ~~and~~the ~~other~~first ~~factors~~six ~~which~~months ~~may~~of befiscal ~~identified~~2005 ~~from time-to-time in Mercury’s Securities~~ and ~~Exchange~~2004, ~~Commission filings and other public announcements.~~respectively:

PART II — OTHER INFORMATION



		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

~~Item~~ Revenue 1for 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. ~~Legal~~The ~~Proceedings~~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 ~~On May 1, 2002, Mercury received a Notice of~~ ~~Violation (“NOV”) for its Fort Wayne, Indiana facility~~ alleging that Mercury’s Spill Prevention, Control and Countermeasure Plan (the “SPCC Plan”) did not meet certain federal regulatory guidelines. Specifically, the Environmental Protection Agency (“EPA”) alleged that Mercury’s SPCC Plan failed to provide for proper parking, secondary containment, and proper drainage of its refueler trucks. Mercury entered into discussions with the EPA and responded to the NOV. On January 29, 2003, the Company was notified of some deficiencies in its latest SPCC Plan and requested that Mercury submit a written response to its allegations within 30 days. On March 14, 2003, Mercury received a NOV from the United States Environmental Protection Agency, Region 5 (“EPA Region 5”) alleging certain deficiencies in the SPCC for its Fort Wayne, Indiana facility, submitted to the EPA Region 5 in November 2002. Mercury believes that it has resolved all deficiencies except for alleged deficiencies related to secondary containment for refueler trucks for its discrete fuel loading areas. Pursuant to an agreement detailed in a letter submitted to the EPA Region 5 on April 16, 2003, Mercury has been permitted to suspend modifications to its SPCC Plan regarding the installation of secondary containment for its refueler trucks, pending resolution of federal regulatory issues associated with secondary containment for such trucks. The EPA Region 5 has also extended national compliance with regulations related to discrete loading areas until August 17, 2004. In the opinion of management, the ultimate resolution of this matter is not expected to have a material effect on the Company’s consolidated financial statements.

Onsales ~~April 16,~~volume ~~2003~~of 118,328 ~~the~~thousand ~~Plan~~gallons. ~~Committee of~~The ~~Shuttle~~increased ~~America~~sales ~~Corp~~volume ~~filed a Adversary Proceeding~~ in the ~~United States~~first ~~Bankruptcy~~six ~~Court,~~months ~~District~~ of ~~Connecticut~~fiscal ~~alleging~~2005, ~~preferential~~as ~~transfers~~compared into the ~~amount~~first ofsix ~~$995,000.~~months ~~The~~of ~~parties reached~~fiscal ~~a settlement agreement~~2004, ~~which provides that the Company~~represents ~~will~~increased ~~pay~~revenue ~~Shuttle~~of ~~America~~approximately $4013,~~000.~~340 ~~The settlement agreement is subject to approval of the Bankruptcy Court~~thousand.

OnRevenue ~~November 26,~~for ~~2003,~~MercFuel’s ~~Signature Flight~~corporate/fractional ~~Support~~jet ~~Corporation~~ownership ~~filed~~segment awas ~~complaint~~$55,193 ~~against~~thousand ~~Mercury~~on ~~Air~~sales volume of ~~Centers~~24,227 ~~Inc.~~thousand ~~and~~gallons ~~Allied~~in ~~Capital~~the ~~Corporation~~first ~~alleging: (1) breach~~six months of ~~contract~~fiscal ~~and~~2005, an ~~tortious~~increase ~~Interference~~of ~~with contract~~$27,859 ~~against~~thousand, ~~Allied;~~or ~~(2) interference~~101.9%, ~~with~~and ~~prospective~~7,441 thousand ~~economic~~gallons, ~~advantage~~or ~~against~~44.3%, ~~Allied;~~from ~~and~~the ~~(3) unfair~~first ~~business~~six months of fiscal ~~practices~~2004’s ~~against~~revenue ~~Mercury~~of ~~and~~$27,334 ~~Allied.~~thousand ~~The~~on ~~Company~~sales ~~believes~~volume ~~that~~of ~~the~~16,786 ~~allegations~~thousand ~~are~~gallons. ~~without~~The ~~merit~~increase ~~and~~in sales revenue is indue to the ~~process~~increase ofin worldwide petroleum product prices, increased ~~preparing~~use aof ~~response.~~private ~~The~~aircraft ~~Company~~for ~~has~~both ~~agreed~~business toand ~~indemnify~~personal ~~Allied~~travel and ~~its~~MercFuel’s ~~affiliates~~strategic ~~(including,~~focus ~~without~~on ~~limitation,~~this ~~Air~~business ~~Centers~~segment. ~~after~~The average sales price for aviation jet fuel in the corporate/fractional ~~closing~~jet ofownership segment in the ~~FBO~~first ~~Sale),~~six months ~~directors,~~of ~~officers,~~fiscal ~~agents,~~2005 increased 39.9% as compared to the first ~~employees~~six ~~and~~months ~~controlling~~of ~~persons~~fiscal ~~from~~2004 ~~any~~equating ~~liability,~~to increased revenue of ~~obligation~~approximately $15,742 ~~loss~~thousand. orThe ~~expense~~increased sales volume equates to ~~which~~an ~~Allied~~increase ~~may~~in ~~become~~revenue of approximately $12,117 thousand.

19 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.

~~Table~~ Air Cargo’s revenue was $22,578 thousand in the first six months of ~~Contents~~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.

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



			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

OnThe ~~December 5,~~cargo ~~2003~~handling segment reported revenue of $14,816 thousand in the ~~Company~~first ~~terminated its~~six ~~Chief~~months ~~Operating~~of ~~Officer~~fiscal 2005, an increase of ~~Mercury~~$1,688 ~~Air~~thousand, ~~Cargo~~or 12.9%, ~~This~~from ~~former~~the first six months ~~employee~~of isfiscal ~~claiming~~2004 ~~one~~revenue ~~year~~of $13,128 thousand. Cargo handling’s ~~salary,~~gross ~~(approximately~~margin in the first six months of fiscal 2005 was $~~170~~2,~~000)~~113 thousand, ~~and~~an ~~other~~increase ~~damages~~of as$650 athousand, ~~result~~or 44.4%, offrom the ~~termination.~~first Onsix months of fiscal 2004 gross margin of ~~December 31~~$1,463 ~~2003,~~thousand. heThe ~~filed~~improved ~~notice~~results are mainly due to increased cargo handling volume as a result of ~~demand~~an ~~for~~improved worldwide ~~mediation~~economy and Air Cargo’s focus on cost control.

The ~~Company~~cargo islogistics ~~also~~services asegment ~~defendant~~reported revenue inof ~~certain litigation~~$5,347 ~~arising~~thousand in the ~~normal~~first ~~course~~six months of ~~business.~~fiscal 2005, Inan ~~the opinion~~increase of ~~management~~$1,186 ~~the~~thousand ~~ultimate~~or ~~resolution~~28.5%, offrom ~~such~~the first ~~litigation~~six ~~will~~months ~~not~~of ~~have~~fiscal a2004 ~~material~~revenue ~~effect~~of on$4,161 ~~its~~thousand. ~~consolidated~~The ~~financial~~increased ~~statements.~~revenue ~~Reference~~in ~~is made to~~ the ~~Company’s Annual~~first ~~Report~~six onmonths ~~Form 10-K~~of ~~for~~fiscal ~~the~~2005 ~~period ended~~is ~~June 30,~~mainly ~~2003~~due ~~for~~to ~~additional~~the ~~litigation~~increased ~~matter~~business ~~with~~activity ~~respect~~associated with toAir ~~which~~Cargo’s noMercury ~~material~~World ~~developments~~Cargo ~~have~~(“MWC”) operation. ~~occurred~~Cargo inlogistics ~~the current~~services ~~quarter.~~

~~Item 2. Change in Securities~~23

~~None~~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.

~~Item~~ The 3cargo 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. ~~Default~~The GSA ~~Upon~~services’ ~~Senior~~gross ~~Securities~~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.

~~None~~Air Cargo’s administrative expenses in the first six months of fiscal 2005 were $803 thousand, a decrease of $153 thousand from last year.

~~Item~~ Maytag 4reported 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. ~~Submission~~Maytag’s first six months of ~~Matters~~fiscal to2005 gross margin was $2,529 thousand, a ~~Vote~~decrease of ~~Security~~$214 ~~Holders~~thousand from the first six months of fiscal 2004 gross margin of $2,743 thousand.

None



			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

~~Item~~ The 5decrease 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. ~~Other~~The ~~Information~~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.

~~None~~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.

~~Item~~ Selling, 6general 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% ~~Exhibits~~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 ~~Exhibit~~severance costs. ~~List~~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.

~~(a) Exhibits~~Depreciation and ~~Reports~~amortization onexpense from ~~Form 8-K:~~continuing operations was $1,254 thousand in the current period as compared to $1,426 thousand last year.

Exhibit
No.		Description
	2.1	Agreement and Plan of Merger adopted January 9, 2001.(17)
	2.2	Certificate of Merger.(17)
	2.3	Stock Purchase Agreement Dated as of October 28, 2003. By and Among Allied Capital Corporation, Mercury Air Centers, Inc. and Mercury Air Group, Inc.(28)
	3.1	Certificate of Incorporation.(17)
	3.2	Amended and Restated Bylaws of Mercury Air Group, Inc. adopted December 7, 2002.(25)
	3.3	Certificate of Designations of Series A 8% Cumulative Convertible Preferred Stock.(27)
	4.1	Loan Agreement between California Economic Development Financing Authority and Mercury Air Group, Inc. relating to $19,000,000 California Economic Development Financing Authority Variable Rate Demand Airport Facilities Revenue Bonds, Series 1998 (Mercury Air Group, Inc. Project) dated as of April 1, 1998.(2)
	4.2	Securities Purchase Agreement dated September 10, 1999 by and among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(12)
	4.3	Amendment No. 1 dated as of September 30, 2000 by and between J.H. Whitney Mezzanine, L.P. and Mercury Air Group, Inc. to the Securities Agreement.(16)
	4.4	Waiver and Consent Agreement dated as of December 29, 2000 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(17)
	4.5	Waiver and Consent Agreement dated as of July 2, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(18)

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.

2024

~~Table~~ The Company recognized an impairment loss associated with the MercMed aircraft in the amount of ~~Contents~~$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”.

Exhibit
No.		Description
	4.6	Waiver Agreement dated as of September 25, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P.(18)
	4.7	Amendment No. 2 dated as of September 30, 2001 by and between J.H. Whitney Mezzanine Fund, L.P. and Mercury Air Group, Inc. to the Securities Purchase Agreement.(19)
	4.8	Waiver Agreement dated as of November 26, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(21)
	4.9	Waiver Agreement dated as of December 21, 2001 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(21)
	4.10	Waiver Agreement dated as of June 26, 2002 among Mercury Air Group, Inc. and J.H. Whitney Mezzanine, L.P.(24)
	4.11	Amendment No. 3 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and J.H. Whitney Mezzanine Fund, L.P. dated as of December 30, 2002.(26)
	4.12	Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated September 10, 1999.(26)
	4.13	Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Senior Subordinated Promissory Note dated September 10, 1999.(26)
	4.14	Security Agreement by and between Mercury Air Group, Inc. and each of its subsidiaries hereto as Obligors and J.H. Whitney Mezzanine Fund, L.P. as the Lenders, dated as of December 30, 2002.(26)
	4.15	Subordination Agreement among J.H. Whitney Mezzanine Fund, L.P. Foothill Capital Corporation, as Agent and Mercury Air Group, Inc. and certain of its subsidiaries signatory thereto, dated as of December 30, 2002.(26)
	4.16	Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain subsidiaries signatory thereto, dated as of December 30, 2002.(26)
	4.17	First Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain of its subsidiaries, dated March 12, 2003.(30)
	4.18	Second Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain of its subsidiaries, dated March 31, 2003.(30)
	4.19	Third Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain of its subsidiaries, dated July 16, 2003.(30)
	4.20	Fourth Amendment to Loan and Security Agreement by and among Foothill Capital Corporation and Mercury Air Group, Inc. and certain of its subsidiaries, dated August 1, 2003.(30)
	4.21	Amendment No. 4 to Securities Purchase Agreement by and between Mercury Air Group, Inc. and Allied Capital Corporation, as Assignee of J.H. Whitney Mezzanine Fund, L.P. dated as of October 28, 2003(28)
	4.22	Assignment of Note dated as of October 28, 2003 between Allied Capital Corporation and J.H. Whitney Mezzanine Fund, L.P.(28)
	4.23	Second Amended and Restated Allied Capital Corporation 12% Senior Subordinated Promissory Note dated September 10, 1999(28)
	4.24	Second Amended and Restated Allied Capital Corporation Warrant dated October 28, 2003(28)
	4.25	Securities Purchase Agreement dated as of October 28, 2003 by and among J.H. Whitney Mezzanine Fund, L.P. and J.H. Whitney Mezzanine Debt Fund, L.P., Allied Capital Corporation and Mercury Air Group, Inc.(28)
	4.26	Second Amended and Restated J.H. Whitney Mezzanine Fund, L.P. Warrant dated October 28, 2003(28)
	10.1	Mercury Air Group, Inc.’s 1990 Long-Term Incentive Plan.(4)*
	10.2	Mercury Air Group, Inc.’s 1990 Directors Stock Option Plan.(1)*

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.

21 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.

~~Table~~ The effective income tax rate in the first six months of ~~Contents~~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.

Exhibit
No.		Description
	10.3	Memorandum Dated September 15, 1997 regarding Summary of Officer Life Insurance Policies with Benefits Payable to Officers or Their Designated Beneficiaries.(8)*
	10.4	Non-Qualified Stock Option Agreement dated March 21, 1996, by and between Frederick H. Kopko and Mercury Air Group, Inc.(6)*
	10.5	Mercury Air Group, Inc.’s 1998 Long-Term Incentive Plan.(10)*
	10.6	Mercury Air Group, Inc.’s 1998 Directors Stock Option Plan.(10)*
	10.7	Revolving Credit and Term Loan Agreement dated as of March 2, 1999 by and among Mercury Air Group, Inc., The Banks listed on Schedule 1 thereto, and The Fleet National Bank f/k/a BankBoston, N.A., as Agent.(11)
	10.8	First Amendment to Revolving Credit and Term Loan Agreement dated as of September 10, 1999.(14)
	10.9	Second Amendment to Revolving Credit and Term Loan Agreement dated as of March 31, 2000.(14)
	10.10	Third Amendment, Waiver and Consent to Revolving Credit and Term Loan Agreement dated as of August 11, 2000.(14)
	10.11	The Company’s 401(k) Plan consisting of CNA Trust Corporation. Regional Prototype Defined Contribution Plan and Trust and Adoption Agreement.(14)*
	10.12	Employment Agreement dated July 31, 2000 between the Company and Dr. Philip J. Fagan.(15)*
	10.13	Fourth Amendment to Revolving Credit and Term Loan Agreement dated as of November 14, 2000.(16)
	10.14	Amendment No. 1 to Mercury Air Group, Inc. 1998 Long-Term Incentive Option Plan as of August 22, 2000.(16)*
	10.15	Amendment No. 1 to Mercury Air Group, Inc. 1998 Directors Stock Option Plan as of August 22, 2000.(16)*
	10.16	Limited Waiver letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 21, 2001.(18)
	10.17	Fifth Amendment to Revolving Credit and Term loan Agreement dated as of September 21, 2001.(18)
	10.18	Limited Consent letter Agreement to Revolving Credit and Term Loan Agreement dated as of September 30, 2001.(19)
	10.20	Limited waiver and Consent to Revolving Credit and Term Loan Agreement dated as of December 31, 2001.(21)
	10.21	2002 Management Stock Purchase Plan.(22)
	10.22	Amended and Restated Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Joseph A. Czyzyk.(22)*
	10.23	Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Wayne J. Lovett(22)*
	10.24	Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and John Enticknap(22)*
	10.25	Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Mark Coleman(22)*
	10.26	Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Steven S. Antonoff(22)*
	10.27	Employment Agreement dated May 22, 2002 between Mercury Air Group, Inc. and Robert Schlax(22)*

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.

22 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.

~~Table~~ Liquidity ofand ~~Contents~~Capital Resources

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

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 ~~Denotes~~cash ~~managements’~~used ~~contract~~in oroperations ~~compensation~~in ~~plan~~the orfirst ~~arrangement~~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.

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

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.

~~(10)~~ The ~~Such~~Company ~~document~~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, ~~previously~~in ~~filed~~part, asby ~~Appendix~~a cash advance on the B of A toCredit Facility in the amount of $10,000 thousand. The Company’s ~~Proxy~~received ~~Statement~~$1,687 thousand ~~for~~in the ~~December~~second 3,quarter ~~1998~~of ~~Annual~~fiscal ~~Meeting~~2005 as a result of ~~Stockholders~~the exercise of stock options and iswarrants. ~~incorporated~~The ~~herein~~Company bypurchased 150,000 shares ~~reference~~of common stock for $6.00 per share in accordance with the settlement agreement with Murdock in the first quarter of fiscal 2005.

2325

~~Table~~ On July 29, 2004, the Company and Bank of America ~~Contents~~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.

(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.

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.

~~(b)~~On November ~~Reports~~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 ~~Form~~capital requirements. As of December 31, 2004, the Company’s borrowing under the revolving credit line was $8~~-K:~~,000 thousand.

AOn ~~Form~~November ~~8-K~~1, ~~was~~2004, ~~filed~~the ~~dated~~Company and Bank of ~~September 30,~~America ~~2003~~entered ~~reporting~~into onthe ~~Item 5,~~LOC ~~Other~~and ~~Events~~Reimbursement Agreement relating to the outstanding tax exempt bonds issued in 1998 pursuant to a loan agreement between the Company and ~~Regulation~~CEDFA. As of November FD1, ~~Disclosure~~2004, asthe tooutstanding ~~preliminary~~principal ~~operational~~amount of ~~results~~the ~~for~~bonds outstanding was $14,000 thousand. In accordance with the ~~three~~terms of the LOC and ~~twelve-month~~Reimbursement ~~periods~~Agreement, ~~ended~~Bank of ~~June 30~~America has issued the CEDFA LOC that replaced the previously existing irrevocable direct pay letter of credit issued by Wells Fargo Bank, ~~2003~~N.A. Anon ~~amended~~behalf ~~report~~of onthe ~~Form 8-K~~Company, which was simultaneously ~~filed~~cancelled upon issuance of the CEDFA LOC. In onaddition ~~November 19,~~to ~~2003,~~the ~~amending~~issuance of the ~~previous~~CEDFA ~~8-K~~LOC, the LOC and Reimbursement Agreement require the Company to ~~report~~call for redemption bonds in the ~~operational~~principal ~~results~~amount of $500 thousand on each ~~Item~~of April 121 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.

24 Critical Accounting Policies

~~Table~~ Management’s beliefs regarding critical accounting policies have not changed significantly from those discussed in Item 7 of ~~Contents~~the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

~~SIGNATURES~~ Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Pursuant~~There tohas ~~the~~been ~~requirements~~no ofmaterial change during the ~~Securities~~six ~~Exchange~~month ~~Act~~period ofended ~~1934~~December 31, 2004 from the ~~Registrant~~disclosures regarding ~~has~~market ~~duly~~risk ~~caused~~presented ~~this~~in ~~report to~~the beCompany’s ~~signed~~Annual Report on ~~its~~Form 10-K ~~behalf~~for by the ~~undersigned~~fiscal ~~thereunto~~year ~~duly~~ended June 30, ~~authorized~~2004.

~~MERCURY AIR GROUP, INC. Registrant /s/ JOSEPH CZYZYK Joseph Czyzyk Chief Executive Officer /s/ ROBERT SCHLAX Robert Schlax Chief Financial Officer (Principal Financial Officer)~~26

~~Date:~~Item ~~January 12,~~4. ~~2004~~ Controls and Procedures

25 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*

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 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

(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

N/A

Month #2 November 1, 2004 to November 30, 2004

N/A

Month #3 December 1, 2004 to December 31, 2004

8,750

4.90

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.


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)


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)*


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)


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.


(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.


(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.

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

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