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 six months of 2009, the CBS Division generated 56% of our total revenue, compared to 60% in the first six months 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 72% of total contract revenue) and hourly flight fees (approximately 28% of total contract revenue) billed to hospital customers. In the six months ended June 30, 2009, the HBS Division generated 39% of our total revenue, compared to 37% in the six months ended June 30, 2008.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for commercial and governmental entities. The Products Division generated 5% of our total revenue in the six months ended June 30, 2009, compared to 3% in 2008.

See Note 6 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 28% of HBS revenue. By contrast, 81% of our costs primarily associated with flight operations (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) incurred during the first six months of 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 10,400 and 19,800 for the quarter and six months ended June 30, 2009, respectively, compared to approximately 11,600 and 22,200 for the quarter and six months ended June 30, 2008, respectively. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 9,800 and 18,800 in the quarter and six months ended June 30, 2009, respectively, compared to approximately 10,700 and 20,100 in the quarter and six months ended June 30, 2008, respectively. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 307 higher in the quarter and 451 lower in the six months ended June 30, 2009, compared to 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. Pending healthcare legislation, if enacted, may also affect collections. The average gross charge per transport increased 14.8% in the six months ended June 30, 2009, compared to 2008, contributing to an increase of 6.8% in net reimbursement per transport over the same period. Provisions for contractual discounts and estimated uncompensated care for CBS operations are as follows:

                                                                          For six months ended
                                   For quarters ended June 30,                   June 30,
                                   2009                  2008             2009             2008
Gross billings                           100 %                 100 %          100 %            100 %
Provision for contractual
discounts                                 39 %                  33 %           38 %             34 %
Provision for uncompensated
care                                      20 %                  22 %           20 %             21 %

The increase in the total percentage of uncollectible accounts for 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. Three models of aircraft within our fleet, representing 25% 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 34 new aircraft and expect to take delivery of twelve 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 13.3% and ­13.4% from the quarter and six months ended June 30, 2008, to the quarter and six months ended June 30, 2009, respectively, while total flight volume for CBS and HBS operations decreased 5.0% and 6.0% over the same periods. 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 regional 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 was effective January 1, 2006, through April 30, 2009. Negotiations on a new collective bargaining agreement (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 $8,652,000 and $13,640,000 for the quarter and six months ended June 30, 2009, respectively, compared to $4,834,000 and $7,164,000 for the quarter and six months ended June 30, 2008, respectively. Net reimbursement per transport for CBS operations increased 3.6% and 6.8% in the quarter and six months ended June 30, 2009, compared to 2008, while Same-Base Transports for CBS operations were 8.6% and 6.7% lower over the same periods, respectively. Aircraft operating expenses decreased 17.6% and 15.4% for the quarter and six months ended June 30, 2009, compared to 2008, reflecting lower maintenance and fuel costs.

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

Net flight revenue decreased $2,566,000, or 2.1%, and $25,000, or 0.0%, for the quarter and six months ended June 30, 2009, respectively, 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 $6,021,000, or 7.7%, to $71,710,000 for the second quarter of 2009 and $6,870,000, or 4.7%, to $140,086,000 for the six months ended June 30, 2009, for the following reasons:

· Decreases of 922, or 8.6%, and 1,340, or 6.7%, in Same-Base Transports for the quarter and six months ended June 30, 2009, respectively, compared to 2008. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 307 higher in the second quarter of 2009 but 451 lower in the six months ended June 30, 2009, compared to 2008. The decline in Same-Base Transports is believed to be primarily attributable to overall economic conditions in the United States.

· Increases of 13.1% and 14.8% in average gross charge per transport for the quarter and six months ended June 30, 2009, respectively, compared to 2008. Net reimbursement per transport increased approximately 3.6% and 6.8%, over the same periods.

· Incremental net revenue of $5,972,000 and $9,060,000 for the quarter and six months ended June 30, 2009, respectively, generated from the addition of twelve new CBS bases, including two bases resulting from the conversion of an HBS contract, either during or subsequent to the first six months of 2008 and new service agreements with another air medical service provider in the Atlanta area.

· Closure of fifteen bases during or subsequent to the first six months of 2008, resulting in decreases in net revenue of approximately $5,391,000 and $10,388,000 during the quarter and six months ended June 30, 2009, respectively.

· HBS - Net flight revenue increased $3,455,000, or 7.3%, to $50,470,000 for the second quarter of 2009 and $6,845,000, or 7.4%, to $99,108,000 for the six months ended June 30, 2009, for the following reasons:

· Incremental net revenue of $2,764,000 and $5,672,000 for the quarter and six months ended June 30, 2009, generated from the addition of one new contract and the expansion of nine contracts during or subsequent to the first six months of 2008.

· Cessation of service under six contracts and the conversion of one contract to CBS operations subsequent to the first six months of 2008, resulting in decreases in net revenue of approximately $2,024,000 and $4,857,000 for the quarter and six months ended June 30, 2009, respectively.

· 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.

· Decreases of 8.3% and 10.3% in flight volume for the quarter and six months ended June 30, 2009, respectively, 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) decreased $230,000, or 0.4%, and $131,000, or 0.1%, for the quarter and six months ended June 30, 2009, respectively, compared to 2008. Changes by business segment are as follows:

· CBS - Flight center costs decreased $585,000, or 1.8%, to $32,045,000 for the second quarter of 2009 and $1,374,000, or 2.1%, to $63,554,000 for the six months ended June 30, 2009, for the following reasons:

· Increases of approximately $2,656,000 and $4,097,000 for the quarter and six months ended June 30, 2009, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $3,414,000 and $6,472,000 for the quarter and six months ended June 30, 2009, respectively, due to the closure of base locations described above.

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

· HBS - Flight center costs increased $355,000, or 1.7%, to $20,705,000 for the second quarter of 2009 and $1,243,000, or 3.1%, to $41,435,000 for the six months ended June 30, 2009, primarily due to the following:

· Increases of approximately $852,000 and $1,802,000 for the quarter and six months ended June 30, 2009, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $923,000 and $2,301,000 for the quarter and six months ended June 30, 2009, respectively, due to the closure of base locations described above.

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

Aircraft operating expenses decreased $5,366,000, or 17.6%, and $8,847,000, or 15.4%, for the quarter and six months ended June 30, 2009, respectively, compared to 2008. Aircraft operating expenses consist of fuel, insurance, and maintenance costs and generally are a function of the size of the fleet, the type of aircraft flown, and the number of hours flown. The change in costs is due to the following:
· Decreases of $2,951,000, or 13.3%, and $5,728,000, or 13.4%, for the quarter and six months ended June 30, 2009, respectively, 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 42 new helicopters into service (consisting of 24 single-engine aircraft and 18 twins) and eliminated 38 aircraft which were older models (consisting of 8 single-engine aircraft, 27 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.

· Decreases of approximately 48.9% and 43.0% in the cost of aircraft fuel per hour flown for the quarter and six months ended June 30, 2009, respectively. Total fuel costs decreased $2,669,000 and $4,080,000 for the quarter and six months ended June 30, 2009, respectively, compared to 2008.

· 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 $968,000, or 8.3%, and $2,116,000, or 9.3%, for the quarter and six months ended June 30, 2009, respectively, in comparison to the prior year. Incremental rental expense incurred for 31 leased aircraft added to our fleet during either 2008 or 2009 totaled $1,609,000 and $4,031,000 for the quarter and six months ended June 30, 2009, respectively. The increase for new aircraft was offset in part by selling or refinancing eighteen aircraft at lower lease rates or through debt financing.

Products Division

Medical interiors and products revenue increased $2,707,000, or 84.3%, and $6,730,000, or 98.4%, for the quarter and six months ended June 30, 2009, respectively, compared to 2008. Significant projects in process during 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 five medical interior kits for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2009, was as follows:
· $4,243,000 and $10,484,000 - governmental entities

· $1,677,000 and $3,085,000 - commercial customers

Significant projects in 2008 included seven medical interior kits for commercial customers, three of which were still in process as of June 30, 2008. Also in process as of June 30, 2008, were two design contracts for the U.S. Army, 35 multi-mission interiors for the U.S. Army's HH-60L helicopter, and fifty MEV litter systems. Revenue by product line for the quarter and six months ended June 30, 2008, was as follows:
· $1,742,000 and $3,309,000 - governmental entities

· $1,471,000 and $3,530,000 - commercial customers

Cost of medical interiors and products increased $1,832,000, or 78.3%, and $4,986,000, or 93.3%, for the quarter and six months ended June 30, 2009, respectively, as compared to the prior year, due primarily to changes in sales volume and sales mix. The average net margin earned on projects during 2009 was 19.9% for the second quarter and 17.7% for the six-month period compared to 11.3% for the second quarter and 11.5% for the six-month period in 2008. Costs in 2008 also included development and design work on avionics and other aircraft interior configurations for commercial customers, leading to higher engineering and documentation costs and lower profit margins.

General Expenses

General and administrative (G&A) expenses decreased $2,411,000, or 13.7%, and $2,314,000, or 6.7%, for the quarter and six months ended June 30, 2009, respectively, compared to 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. The following events contributed to the decrease in G&A expenses:
· Completion of the consolidation of the Part 135 Air Carrier Certificate for CJ Systems Aviation Group, Inc., (CJ) into the Air Methods certificate during the second quarter of 2008. Costs of $505,000 and $1,195,000 were incurred in the quarter and six months ended June 30, 2008, respectively, related to the consolidation.

· Reorganization of field-based program management during the second quarter of 2009, resulting in the elimination of fifteen positions and the transfer of other personnel into other open positions within the Company.

· Closure of the CJ patient billing office and incorporation of these functions into our existing billing department, resulting in the elimination of sixteen full-time positions as well as additional contract positions. The transition was completed during the second quarter of 2008.

· Consolidation of corporate overhead functions.

Income tax expense was $5,374,000 and $8,526,000 in the quarter and six months ended June 30, 2009, respectively, and $3,482,000 and $5,104,000 in the quarter and six months ended June 30, 2008, respectively. The effective tax rate was approximately 38% for 2009 and 41% for 2008. 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 June 30, 2009, was $112,695,000, compared to $115,962,000 at December 31, 2008. Cash generated by operations was $24,107,000 in 2009, compared to $23,506,000 in 2008, reflecting the change in operating results described above.

Cash used by investing activities totaled $8,968,000 in 2009 compared to $17,839,000 in 2008. Significant equipment acquisitions in 2009 included the purchase of five aircraft for approximately $13.9 million. During 2009 we sold five aircraft for total proceeds of $2.7 million and received $1.5 million in insurance proceeds for an aircraft damaged in a ground incident. Equipment acquisitions in 2008 included the buyout of seven leased aircraft for approximately $6.1 million and the buyout of five CJ leased aircraft for approximately $6.3 million, three of which were subsequently sold during the period for net proceeds of approximately $3.5 million. We also sold four other aircraft during the period for total proceeds of $2.4 million.

Financing activities used $17,516,000 in 2009 compared to $1,227,000 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 used proceeds of $16.9 million from five new long-term debt agreements to purchase two helicopters and to pay off $10.2 million of short-term notes payable to an aircraft manufacturer for the delivery of three helicopters. The notes are payable over five- or seven-year terms and have a weighted average interest rate of 7.1%. We used proceeds from operations to fully pay off the balance against our revolving credit facility as of June 30, 2009.

As of December 31, 2008, we had open purchase commitments totaling approximately $165.3 million for 56 aircraft. During 2009, we canceled commitments totaling approximately $124.7 million for 40 aircraft due to changes in fleet requirements. We either have already taken delivery or currently intend to take delivery of the remaining 16 aircraft covered by these commitments. As of June 30, 2009, we do not expect to forfeit any material deposits related to aircraft commitment cancellations since the deposits have either already been applied to purchases or are expected be refunded to us in 2009.

As of June 30, 2009, we are scheduled to take delivery of twelve new aircraft before the end of the year. Commitments for long-term debt or lease financing have been received to cover the purchase price and cost to install medical interiors for all twelve aircraft.

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, and again July 1, 2009, we increased prices for our CBS operations an average of approximately 5%. In the first six months 2009, we opened eight new bases, including two resulting from the conversion of an HBS customer to CBS operations, 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.

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 seventeen hospital customers are due for renewal in 2009, four of which have been renewed for terms ranging from one to three years. Three contracts will not be renewed upon expiration in the third or fourth quarters of 2009.

Products Division

As of June 30, 2009, we had 48 HH60L units, 81 MEV units, six commercial medical interiors, and one design contract with the U.S. Army in process. During the second quarter of 2009, the U.S. Army notified us that it intends 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 $13.9 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 . . .