The following discussion of the results of operations and financial condition should be read in conjunction with our consolidated financial statements and notes thereto included in Item 1 of this report. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words "believe," "expect," "anticipate," "plan," "estimate," and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results; flight volume and collection rates for CBS operations; size, structure and growth of our air medical services and products markets; continuation and/or renewal of HBS contracts; acquisition of new and profitable Products Division contracts; and other matters. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management's Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements.

Overview

We provide air medical transportation services throughout the United States and design, manufacture, and install medical aircraft interiors and other aerospace products for domestic and international customers. Our divisions, or business segments, are organized according to the type of service or product provided and consist of the following:
· Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service. Revenue consists of flight fees billed directly to patients, their insurers, or governmental agencies, and cash flow is dependent upon collection from these individuals or entities. In the first quarter of 2009 the CBS Division generated 55% of our total revenue, decreasing from 59% in the first quarter of 2008.

· Hospital-Based Services (HBS) - provides air medical transportation services to hospitals throughout the U.S. under exclusive operating agreements. Revenue consists of fixed monthly fees (approximately 73% of total contract revenue) and hourly flight fees (approximately 27% of total contract revenue) billed to hospital customers. In the first quarter of 2009 the HBS Division generated 39% of our total revenue, increasing from 38% in 2008.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. In the first quarter of 2009 the Products Division generated 6% of our total revenue, compared to 3% in 2008.

See Note 5 to the consolidated financial statements included in Item 1 of this report for operating results by segment.

We believe that the following factors have the greatest impact on our results of operations and financial condition:

· Flight volume. Fluctuations in flight volume have a greater impact on CBS operations than HBS operations because almost all of CBS revenue is derived from flight fees, as compared to approximately 27% of HBS revenue. By contrast, 78% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the quarter ended March 31, 2009, are mainly fixed in nature. While flight volume is affected by many factors, including competition and the effectiveness of marketing and business development initiatives, the greatest single variable has historically been weather conditions. Adverse weather conditions-such as fog, high winds, or heavy precipitation-hamper our ability to operate our aircraft safely and, therefore, result in reduced flight volume. Total patient transports for CBS operations were approximately 9,400 for the first quarter of 2009 compared to approximately 10,600 for the first quarter of 2008. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 9,000 in the first quarter of 2009, compared to 9,400 in the first quarter of 2008. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 758 lower in the first quarter of 2009, compared to the first quarter of 2008. We believe that Same-Base Transports in 2009 were negatively affected by the overall weaker economic conditions in the United States.

· Reimbursement per transport. We respond to calls for air medical transports without pre-screening the creditworthiness of the patient and are subject to collection risk on services provided to insured and uninsured patients. Medicare and Medicaid also receive contractual discounts from our standard charges for flight services. Flight revenue is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. Net reimbursement per transport for CBS operations is primarily a function of price, payer mix, and timely and effective collection efforts. Both the pace of collections and the ultimate collection rate are affected by the overall health of the U.S. economy, which impacts the number of indigent patients and funding for state-run programs, such as Medicaid. Medicaid reimbursement rates in many jurisdictions have remained well below the cost of providing air medical transportation. In addition, the collection rate is impacted by changes in the cost of healthcare and health insurance; as the cost of healthcare increases, health insurance coverage provided by employers may be reduced or eliminated entirely, resulting in an increase in the uninsured population. The average gross charge per transport increased 16.8% in the quarter ended March 31, 2009, compared to 2008, contributing to an increase of 10.3% in net reimbursement per transport in the quarter ended March 31, 2009, compared to 2008. Provisions for contractual discounts and estimated uncompensated care for CBS operations were as follows:

                                               For quarters ended March 31,
                                                2009                  2008
      Gross billings                                  100 %                 100 %
      Provision for contractual discounts              37 %                  36 %
      Provision for uncompensated care                 20 %                  19 %

The increase in the total percentage of uncollectible accounts for the first quarter of 2009 is primarily attributable to price increases. Although price increases generally increase the net reimbursement per transport from insurance payers, the amount per transport collectible from private patient payers and Medicare and Medicaid does not increase proportionately with price increases. Therefore, depending upon overall payer mix, price increases will usually result in an increase in the percentage of uncollectible accounts. Although we have not yet experienced significant increased limitations in the amount reimbursed by insurance companies, continued price increases may cause insurance companies to limit coverage for air medical transport to amounts less than our standard rates.

· Aircraft maintenance. Both CBS and HBS operations are directly affected by fluctuations in aircraft maintenance costs. Proper operation of the aircraft by flight crews and standardized maintenance practices can help to contain maintenance costs. Increases in spare parts prices from original equipment manufacturers tend to be higher for aircraft which are no longer in production. Four models of aircraft within our fleet, representing 27% of the rotor wing fleet, are no longer in production and are, therefore, susceptible to price increases which outpace general inflationary trends. In addition, on-condition components are more likely to require replacement with age. Since January 1, 2008, we have taken delivery of 33 new aircraft and expect to take delivery of four additional aircraft through the end of 2009. We have replaced discontinued models and other older aircraft with the new aircraft, as well as provided capacity for base expansion. Replacement models of aircraft typically have higher ownership costs than the models targeted for replacement but lower maintenance costs. Total maintenance expense for CBS and HBS operations decreased 13.5% from the first quarter of 2008 to the first quarter of 2009, while total flight volume for CBS and HBS operations decreased 7.0% over the same period. Maintenance cost per hour on newer aircraft has remained relatively constant on an annual basis. Maintenance cost per hour on older models of aircraft, however, may vary more widely on a quarterly basis depending on component overhaul and replacement and aircraft refurbishment cycles.

· Competitive pressures from low-cost providers. We are recognized within the industry for our standard of service and our use of cabin-class aircraft. Many of our competitors utilize aircraft with lower ownership and operating costs and do not require a similar level of experience for aviation and medical personnel. Reimbursement rates established by Medicare, Medicaid, and most insurance providers are not contingent upon the type of aircraft used or the experience of personnel. However, we believe that higher quality standards help to differentiate our service from competitors and, therefore, lead to higher utilization.

· Employee recruitment and relations. The ability to deliver quality services is partially dependent upon our ability to hire and retain employees who have advanced aviation, nursing, and other technical skills. In addition, hospital contracts typically contain minimum certification requirements for pilots and mechanics. In September 2003, our pilots voted to be represented by a collective bargaining unit, and we signed a collective bargaining agreement on March 31, 2006. The agreement is effective January 1, 2006, through April 30, 2009. Negotiations on a new CBA commenced in the fourth quarter of 2008 and were referred for mediation during the second quarter of 2009. Under the Railway Labor Act, mediation decisions are non-binding on either party, and the duration of the process may vary depending upon the mediator assigned and the complexity of the issues negotiated. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $4,988,000 for the three months ended March 31, 2009, compared to $2,330,000 for the three months ended March 31, 2008. Net reimbursement per transport for CBS operations increased 10.3% in the first quarter of 2009 compared to the first quarter of 2008, while Same-Base Transports for CBS operations were 4.4% lower over the same period. Aircraft operating expenses decreased 12.9%, reflecting lower maintenance and fuel costs.

Flight Operations - Community-based Services and Hospital-based Services

Net flight revenue increased $2,541,000, or 2.2%, from $114,473,000 to $117,014,000 for the three months ended March 31, 2009, compared to 2008. Flight revenue is generated by both CBS and HBS operations and is recorded net of provisions for contractual discounts and uncompensated care.

· CBS - Net flight revenue decreased $849,000, or 1.2%, to $68,376,000 in the three months ended March 31, 2009, compared to 2008, for the following reasons:

· Increase of 16.8% in average gross charge per transport for the first quarter of 2009, compared to 2008. Net reimbursement per transport increased approximately 10.3% over the same period.

· Incremental net revenue of $3,088,000 generated from the addition of seven new CBS bases either during or subsequent to the first quarter of 2008, and new service agreements with another air medical service provider in the Atlanta area.

· Closure of fifteen bases either during or subsequent to the first quarter of 2008 resulting in a decrease in net revenue of approximately $4,997,000.

· Decrease in Same-Base Transports of 4.4% in the first quarter of 2009 compared to 2008. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 758 lower in the first quarter of 2009, compared to the first quarter of 2008. The decline in Same-Base Transports is believed to be primarily attributable to overall economic conditions in the United States.

· HBS - Net flight revenue increased $3,390,000, or 7.5%, to $48,638,000 for the quarter ended March 31, 2009, for the following reasons:

· Incremental net revenue of $2,908,000 generated from the addition of one new contract and the expansion of eight contracts during or subsequent to the first quarter of 2008.

· Cessation of service under six contracts during or subsequent to the first quarter of 2008, resulting in a decrease in net revenue of approximately $2,834,000.

· Annual price increases in the majority of contracts based on changes in the Consumer Price Index or spare parts prices from aircraft manufacturers and the renewal of contracts at higher rates.

· Decrease of 12.5% in flight volume for all contracts excluding new contracts, contract expansions, and closed contracts discussed above.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $99,000, or 0.2%, to $52,239,000 for the quarter ended March 31, 2009, compared to 2008. Changes by business segment are as follows:

· CBS - Flight center costs decreased $789,000, or 2.4%, to $31,509,000 for the following reasons:

· Increase of approximately $1,440,000 for the addition of personnel to staff new base locations described above.

· Decrease of $3,058,000 due to the closure of base locations described above.

· Increases in salaries for merit pay raises and in the cost of our medical insurance premiums.

· HBS - Flight center costs increased $888,000, or 4.5%, to $20,730,000 primarily due to the following:

· Increase of approximately $950,000 for the addition of personnel to staff new base locations described above.

· Decrease of $1,376,000 due to the closure of base locations described above.

· Increases in salaries for merit pay raises and in the cost of our medical insurance premiums.

Aircraft operating expenses decreased $3,481,000, or 12.9%, for the quarter ended March 31, 2009, in comparison to the quarter ended March 31, 2008. Aircraft operating expenses consist primarily of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, type of aircraft flown, and number of hours flown. The decrease in costs is due to the following:
· Decrease of $2,777,000, or 13.5%, in the cost of aircraft maintenance, primarily attributable to our fleet rejuvenation efforts and to our increasing use of single-engine, rather than twin-engine, aircraft. Since the first quarter of 2008, we have placed 36 new helicopters into service (consisting of 21 single-engine aircraft and 15 twins) and eliminated 28 aircraft which were older models (consisting of 6 single-engine aircraft, 19 twins, and 3 fixed wing aircraft). Maintenance cost per hour on newer aircraft has remained relatively constant on an annual basis. Maintenance cost per hour on older models of aircraft, however, may vary more widely on a quarterly basis depending on component overhaul and replacement and aircraft refurbishment cycles.

· Decrease of approximately 35.4% in the cost of aircraft fuel per hour flown.

· Decreases in flight volume for bases open longer than one year for both CBS and HBS as described above.

· Increase in hull insurance rates effective July 2008.

Aircraft rental expense increased $1,148,000, or 10.4%, for the first quarter of 2009 compared to the first quarter of 2008. Incremental rental expense incurred in 2009 for 31 leased aircraft added to our fleet during either 2008 or 2009 totaled $2,422,000. The increase for new aircraft was offset in part by selling or refinancing seventeen aircraft at lower lease rates or through debt financing.

Medical Interiors and Products

Sales of medical interiors and products increased $4,023,000, or 110.9%, from $3,626,000 for the first quarter of 2008 to $7,649,000 for the first quarter of 2009. Significant projects in process during the first quarter of 2009 included 48 multi-mission interiors for the U.S. Army's HH-60L helicopter, 81 litter systems for the U.S. Army's Medical Evacuation Vehicle (MEV), and four modular medical interior kits for commercial customers. A contract for sixty MEV units was also completed during the first quarter. Revenue by product line was as follows:
· $2,686,000 - multi-mission interiors

· $1,317,000 - modular medical interiors

· $3,646,000 - other aerospace and medical transport products

Significant projects in the first quarter of 2008 included four modular medical interior kits for commercial customers, three of which were still in process as of March 31, 2008. Also in process as of March 31, 2008, were two design contracts for the U.S. Army, ten HH-60L units, and fifty MEV units. Revenue by product line was as follows:
· $818,000 - multi-mission interiors

· $1,755,000 - modular medical interiors

· $1,053,000 - other aerospace and medical transport products

Cost of medical interiors and products increased $3,154,000, or 105.1%, for the three months ended March 31, 2009, as compared to the previous year, due primarily to the change in sales volume. The average net margin earned on projects during 2009 was 16.0% compared to 11.8% in 2008. Margins earned on multi-mission interiors and other governmental contracts are generally higher than margins earned on medical interiors for commercial customers.

General Expenses

Depreciation and amortization expense increased $491,000, or 12.0% for the three months ended March 31, 2009, compared to 2008. The increase is primarily related to the purchase of our corporate headquarters building in October 2008 for $7.4 million and the purchase of fourteen aircraft for approximately $15.6 million subsequent to March 31, 2008.

General and administrative (G&A) expenses increased $97,000, or 0.6%, for the quarter ended March 31, 2009, compared to the quarter ended March 31, 2008. G&A expenses include executive management, accounting and finance, billing and collections, information services, human resources, aviation management, pilot training, dispatch and communications, and CBS program administration. G&A expenses were 13.8% of revenue in 2009, compared to 14.5% in 2008. G&A expenses in 2008 included approximately $690,000 related to the consolidation of the Part 135 Air Carrier Certificate for CJ Systems Aviation Group, Inc., (CJ) into the Air Methods certificate; the consolidation was completed in the summer of 2008.

Interest expense decreased $332,000, or 21.2%, in the first quarter of 2009, compared to the first quarter of 2008, primarily because of a lower long-term debt balance and a decrease of over 300 basis points in the weighted average interest rate paid on variable rate debt in the first quarter of 2009 compared to the first quarter of 2008.

Income tax expense was $3,152,000 in the first quarter of 2009, compared to $1,622,000 in the first quarter of 2008, at effective tax rates of approximately 39% and 41%, respectively. The decrease in the effective tax rate was primarily attributed to a decrease in certain permanent book-tax differences. In addition, the rate used to determine current state income taxes decreased primarily due to a change in Colorado statute defining the apportionment calculation effective January 1, 2009.

Liquidity and Capital Resources

Our working capital position as of March 31, 2009, was $103,733,000, compared to $115,962,000 at December 31, 2008. We had cash and cash equivalents of $9,053,000 at March 31, 2009, compared to $13,147,000 at December 31, 2008. Cash generated by operations was $15,682,000 in the first quarter of 2009, compared to $9,709,000 in the first quarter of 2008, reflecting the change in operating results described above.

Cash used by investing activities totaled $7,877,000 in 2009 compared to $1,176,000 in 2008. Significant equipment acquisitions in the first quarter of 2009 included the purchase of two aircraft for approximately $4.7 million. During the quarter, we sold two aircraft for total proceeds of $1.2 million. Equipment acquisitions in the first quarter of 2008 included the buyout of two CJ leased aircraft which were subsequently sold during the quarter for net proceeds of approximately $2.8 million. Both aircraft had been identified for disposition upon acquisition of CJ in October 2007. We also sold two other aircraft during the quarter for total proceeds of $1.5 million.

Financing activities used $11,899,000 in 2009 compared $1,157,000 in 2008. The primary use of cash in both 2009 and 2008 was regularly scheduled payments of long-term debt and capital lease obligations. In 2008 these payments were partially offset by draws against our line of credit. In 2009 we paid off a $3.9 million short-term note payable to an aircraft manufacturer for the delivery of an EC135 helicopter. We are exploring long-term refinancing options for this balance in the second quarter of 2009.

Outlook for 2009

The statements contained in this Outlook are based on current expectations. These statements are forward-looking, and actual results may differ materially. We undertake no obligation to update any forward-looking statements.

Community-Based Services

Effective January 1, 2009, we increased prices for our CBS operations an average of approximately 5%. In the first quarter of 2009, we opened three new bases and closed four due to insufficient flight volume. We also entered into service agreements in Georgia with another air medical service provider, allowing for base consolidations in the service area. During the second quarter of 2009, we expect to complete the conversion of an HBS customer to CBS operations, resulting in two additional CBS bases.

Hospital-Based Services

In the first quarter of 2009, we began operations under a new three-year contract, representing two aircraft, with a customer in Alaska. Contracts with eighteen hospital customers are due for renewal in 2009, two of which have been renewed for terms ranging from one to three years.

Products Division

As of March 31, 2009, we had 48 HH60L units, 81 MEV units, four commercial medical interiors, and one design contract with the U.S. Army in process. During the second quarter of 2009, we received notice of the customer's intent to reduce the number of MEV units to be delivered under the current contract from 306 units to 81 units, plus a number of spares. Although the impact of the reduction is not yet measurable, under government contract law, we believe we will be entitled to the recovery of costs incurred related to this contract. Deliveries under all contracts in process are expected to be completed early in 2010, and remaining revenue, taking into consideration the reduction in MEV production, is estimated at $12.4 million.

The U.S. Army Multi-Year VII production contract plans for 76 HH-60M Multi-Mission Medevac units plus options for 23 additional units to be delivered by 2012, including the 48 units which we currently have under contract. The units planned under this contract are in addition to the 39 units we have already completed. There is no assurance that orders for additional units will be received in future periods.

All Segments

There can be no assurance that we will continue to maintain flight volume or current levels of collections on receivables for CBS operations, successfully complete planned expansions of CBS and HBS operations, renew operating agreements for our HBS operations, or generate new profitable contracts for the Products Division. Based on the anticipated levels of HBS and CBS flight activity and the projects in process for the Products Division, we expect to generate sufficient cash flow to meet our operational needs throughout the remainder of 2009. Effective March 31, 2009, we amended one of the covenants under our senior credit facility such that the calculation of Total Adjusted Debt (as defined in the senior credit facility) is equal to EBITDAR (Earnings Before Interest, Taxes, Debt, Amortization, and Recurring Rents). Such amendment will provide us with more borrowing capacity as it relates to leased aircraft that have been purchased. There were no other amendments to the senior credit facility other than as described above. At March 31, 2009, we have approximately $32 million of borrowing capacity available under the senior credit facility.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates our estimates and judgments, including those related to revenue recognition, deferred income taxes, and valuation of long-lived assets and goodwill. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Fixed flight fee revenue under our operating agreements with hospitals is recognized monthly over the terms of the agreements. Flight revenue relating to patient transports is recognized upon completion of the services and is recorded net of provisions for contractual discounts and estimated uncompensated care. Both provisions are estimated during the period the related services are performed based on historical collection experience and any known trends or changes in reimbursement rate schedules and payer mix. The provisions are adjusted as required based on actual collections in subsequent periods. We have from time to time experienced delays in reimbursement from third-party payers. In addition, third-party payers may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid . . .