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 nine months ended September 30, 2009, the CBS Division generated 56% of our total revenue, decreasing from 60% in the nine months ended September 30, 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 75% of total contract revenue) and hourly flight fees (approximately 25% of total contract revenue) billed to hospital customers. In the nine months ended September 30, 2009, the HBS Division generated 39% of our total revenue, increasing from 37% in the nine months ended September 30, 2008.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. Products Division generated 5% of our total revenue in the nine months ended September 30, 2009, compared to 3% in the nine months ended September 30, 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 25% of HBS revenue. By contrast, 81% of our costs primarily associated with flight operations incurred during 2009 (including salaries, aircraft ownership costs, hull insurance, and general and administrative expenses) 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 10,800 and 30,600 for the quarter and nine months ended September 30, 2009, respectively, compared to approximately 10,700 and 32,900 for the quarter and nine months ended September 30, 2008, respectively. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 9,900 and 28,700 in the quarter and nine months ended September 30, 2009, respectively, compared to approximately 10,000 and 30,200 in the quarter and nine months ended September 30, 2008, respectively. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 220 higher in the quarter and 231 lower in the nine months ended September 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 13.2% in the nine months ended September 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 quarters ended               For nine months ended
                                                 September 30,                      September 30,
                                            2009             2008            2009                2008
Gross billings                               100 %            100 %           100 %               100 %
Provision for contractual discounts           37 %             33 %            38 %                34 %
Provision for uncompensated care              20 %             21 %            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 41 new aircraft and expect to take delivery of five 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 23.9% and 17.3% from the quarter and nine months ended September 30, 2008, to the quarter and nine months ended September 30, 2009, respectively, while total flight volume for CBS and HBS operations decreased 4.9% and 5.6% 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 $12,604,000 and $26,244,000 for the three and nine months ended September 30, 2009, respectively, compared to net income of $8,369,000 and $15,533,000 for the three and nine months ended September 30, 2008, respectively. Net reimbursement per transport for CBS operations increased 6.6% and 6.8% in the quarter and nine months ended September 30, 2009, compared to 2008, while Same-Base Transports for CBS operations were 1.7% and 5.0% lower over the same periods, respectively. Aircraft operating expenses decreased 22.5% and 18.0% for the quarter and nine months ended September 30, 2009, compared to 2008, reflecting lower maintenance and fuel costs.

Flight Operations - Community-Based Services and Hospital-Based Services

Net flight revenue increased $644,000, or 0.5%, and $619,000, or 0.2%, for the quarter and nine months ended September 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 $2,310,000, or 2.8%, to $80,189,000 for the third quarter of 2009 and $9,180,000, or 4.0%, to $220,275,000 for the nine months ended September 30, 2009, for the following reasons:

· Net revenue of $7,305,000 for the quarter and nine months ended September 30, 2008, pursuant to a contract to support the Federal Emergency Management Agency in disaster recovery efforts. No such revenue was generated in the quarter and nine months ended September 30, 2009.

· Decreases of 171, or 1.7%, and 1,511, or 5.0%, in Same-Base Transports for the quarter and nine months ended September 30, 2009, respectively, compared to 2008. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 220 higher in the third quarter of 2009 but 231 lower in the nine months ended September 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 9.8% and 13.2% in average gross charge per transport for the quarter and nine months ended September 30, 2009, respectively, compared to 2008. Net reimbursement per transport increased approximately 6.6% and 6.8%, over the same periods.

· Incremental net revenue of $7,192,000 and $16,252,000 for the quarter and nine months ended September 30, 2009, respectively, generated from new service agreements with another air medical service provider in the Atlanta area and the addition of twelve new CBS bases, including two bases resulting from the conversion of an HBS contract, during either 2009 or 2008.

· Closure of seventeen bases during either 2009 or 2008, resulting in decreases in net revenue of approximately $4,241,000 and $14,628,000 during the quarter and nine months ended September 30, 2009, respectively.

· HBS - Net flight revenue increased $2,954,000, or 6.1%, to $51,534,000 for the third quarter of 2009 and $9,799,000, or 7.0%, to $150,642,000 for the nine months ended September 30, 2009, for the following reasons:

· Incremental net revenue of $1,540,000 and $7,212,000 for the quarter and nine months ended September 30, 2009, generated from the addition of one new contract and the expansion of nine contracts during either 2009 or 2008.

· Cessation of service under eight contracts during either 2009 or 2008 and the conversion of one contract to CBS operations in the second quarter of 2009, resulting in decreases in net revenue of approximately $2,321,000 and $7,178,000 for the quarter and nine months ended September 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 3.6% and 8.2% in flight volume for the quarter and nine months ended September 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) increased $1,006,000, or 1.9%, and $875,000, or 0.6%, for the quarter and nine months ended September 30, 2009, respectively, compared to 2008. Changes by business segment are as follows:

· CBS - Flight center costs increased $390,000, or 1.2%, to $33,068,000 and decreased $983,000, or 1.0%, to $96,622,000 for the quarter and nine months ended September 30, 2009, respectively, for the following reasons:

· Increases of approximately $3,193,000 and $7,289,000 for the quarter and nine months ended September 30, 2009, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $2,255,000 and $8,727,000 for the quarter and nine months ended September 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 $616,000, or 3.1%, to $20,442,000 and $1,858,000, or 3.1%, to $61,877,000 for the quarter and nine months ended September 30, 2009, respectively, primarily due to the following:

· Increases of approximately $453,000 and $2,255,000 for the quarter and nine months ended September 30, 2009, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $595,000 and $2,889,000 for the quarter and nine months ended September 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 $7,558,000, or 22.5%, and $16,405,000, or 18.0%, for the quarter and nine months ended September 30, 2009, respectively, in comparison 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 decrease in costs is due to the following:
· Aircraft maintenance expense decreased $5,962,000, or 23.9%, to $19,017,000 for the third quarter of 2009 and $11,690,000, or 17.3%, to $56,025,000 for the nine months ended September 30, 2009, 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 47 new helicopters into service (consisting of 27 single-engine aircraft, 19 twins, and 1 fixed wing aircraft) and eliminated 44 aircraft which were older models (consisting of 11 single-engine aircraft, 29 twins, and 4 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.

· The cost of aircraft fuel per hour flown decreased approximately 40.7% and 42.1% for the quarter and nine months ended September 30, 2009, respectively. Fuel costs decreased by $2,231,000 to a total expense of $3,284,000 for the third quarter of 2009 and by $6,311,000 to a total expense of $8,761,000 for the nine months ended September 30, 2009, compared to 2008.

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

· Increases in hull insurance rates effective July 2009 and 2008.

Aircraft rental expense increased $615,000, or 5.0%, and $2,731,000, or 7.8%, for the quarter and nine months ended September 30, 2009, respectively, in comparison to the quarter and nine months ended September 30, 2008. Incremental rental expense incurred for 35 leased aircraft added to our fleet during either 2008 or 2009 totaled $1,461,000 and $5,492,000 for the quarter and nine months ended September 30, 2009, respectively. The increase for new aircraft was offset in part by selling or refinancing 26 aircraft at lower lease rates or through debt financing.

Products Division

Medical interiors and products revenue increased $3,126,000, or 113.5%, and $9,856,000, or 102.8%, for the quarter and nine months ended September 30, 2009, 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 eight medical interior kits for commercial customers. Revenue by product line for the quarter and nine months ended September 30, 2009, was as follows:
· $3,592,000 and $14,076,000 - governmental entities

· $2,287,000 and $5,372,000 - commercial customers

Significant projects in 2008 included nine medical interior kits for commercial customers, three of which were still in process as of September 30, 2008. Also in process as of September 30, 2008, were two design contracts for the U.S. Army, 48 multi-mission interiors for the U.S. Army's HH-60L helicopter, and sixty MEV litter systems. Revenue by product line for the quarter and nine months ended September 30, 2008, was as follows:
· $1,781,000 and $5,090,000 - governmental entities

· $972,000 and $4,502,000 - commercial customers

Cost of medical interiors and products increased $2,086,000, or 121.6%, and $7,072,000, or 100.2%, for the quarter and nine months ended September 30, 2009, compared to 2008, due primarily to changes in sales volume and sales mix. The average net margin earned on projects during 2009 was 34.9% for the third quarter and 22.9% for the nine-month period compared to 25.9% for the third quarter and 15.7% for the nine-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 increased $31,000, or 0.2%, and decreased $2,283,000, or 4.5%, for the quarter and nine months ended September 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 and HBS program administration. The following events contributed to the change 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 $1,195,000 were incurred in the nine months ended September 30, 2008, 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 $7,861,000 and $16,387,000 in the quarter and nine months ended September 30, 2009, respectively, compared to $5,835,000 and $10,939,000 in the quarter and nine months ended September 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 September 30, 2009, was $115,464,000, compared to $115,962,000 at December 31, 2008. Cash generated by operations was $52,105,000 in 2009, compared to $44,318,000 in 2008, reflecting the change in operating results described above.

Cash used by investing activities totaled $32,886,000 in 2009 compared to $26,860,000 in 2008. Significant equipment acquisitions in 2009 included the purchase of sixteen aircraft for approximately $36.1 million. During 2009 we sold eight aircraft for total proceeds of $5.9 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 twenty leased aircraft for approximately $25.4 million, three of which were subsequently sold during the period for net proceeds of approximately $3.5 million. We also sold nine other aircraft during the period for total proceeds of $10.5 million.

Financing activities used $9,185,000 in 2009 compared to $13,421,000 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 we also repurchased 100,000 shares of our common stock for $2.9 million. In 2009 we used proceeds of $34.0 million from thirteen new long-term debt agreements to purchase nine helicopters and to pay off $14.5 million of short-term notes payable to an aircraft manufacturer for the delivery of four helicopters. The long-term notes are payable over five-, seven-, or ten-year terms and have a weighted average interest rate of 6.7%. We used proceeds from operations to fully pay off the balance against our revolving credit facility during the second quarter of 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 $140.5 million for 46 aircraft due to changes in fleet requirements. We have already taken delivery of the remaining 10 aircraft covered by these commitments. As of September 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 been refunded to us, or are expected to be applied against purchases during the fourth quarter of 2009.

As of September 30, 2009, we are scheduled to take delivery of five 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 five aircraft.

Divisional Summary of Events

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 2009, we opened eight new bases, including two resulting from the conversion of an HBS customer to CBS operations, and closed six 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. We opened one new base in the northeast region during the fourth quarter of 2009 and expect to open four additional bases across the United States during the first quarter of 2010.

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, eight of which have been renewed for terms ranging from one to four years. In the third quarter of 2009, we were notified that two contracts which were due for renewal in 2009 will not be renewed upon expiration in the fourth quarter, bringing to five the total number of contracts which will not be renewed in 2009.

Products Division

As of September 30, 2009, we had 48 HH60L units, 81 MEV units, and seven commercial medical interiors in process. During the second quarter of 2009, the U.S. Army notified us that it intended to reduce the number of MEV units to be . . .