Air Methods (AIRM) 10-Q 2008 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-16079

AIR METHODS CORPORATION

(Exact name of Registrant as Specified in Its Charter)

Delaware	84-0915893
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
7301 South Peoria, Englewood, Colorado	80112
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (303) 792-7400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated Filer o	Accelerated Filer x
Non-accelerated Filer o  (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

The number of shares of Common Stock, par value $.06, outstanding as of July 30, 2008, was 12,219,179.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
	Item 1.	Consolidated Unaudited Financial Statements
		Consolidated Balance Sheets – June 30, 2008 and December 31, 2007	1
		Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007	3
		Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	4
		Notes to Unaudited Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
	Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults upon Senior Securities	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	21
SIGNATURES			22

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

(unaudited)

	June 30, 2008			December 31, 2007
Assets
Current assets:
Cash and cash equivalents	$	9,574			5,134
Current installments of notes receivable		750			881
Receivables:
Trade, net		136,042			135,633
Refundable income taxes		--			20,669
Other		2,887			2,760
Total receivables		138,929			159,062
Inventories		17,491			15,241
Work-in-process on medical interiors and products contracts		2,443			1,395
Assets held for sale		22,024			25,865
Costs and estimated earnings in excess of billings on uncompleted contracts		5,741			3,457
Prepaid expenses and other		4,016			3,822
Total current assets		200,968			214,857
Property and equipment:
Land		251			251
Flight and ground support equipment		192,349			179,123
Furniture and office equipment		17,016			16,475
		209,616			195,849
Less accumulated depreciation and amortization		(87,706	)		(81,103	)
Net property and equipment		121,910			114,746
Goodwill (note 2)		22,433			20,307
Notes receivable, less current installments		697			1,251
Other assets, net of accumulated amortization of $2,079 and $1,959 at June 30, 2008 and December 31, 2007, respectively		20,241			18,391
Total assets	$	366,249			369,552
				(Continued)

1

Air Methods Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS, Continued

(Amounts in thousands, except share and per share amounts)

(unaudited)

	June 30, 2008		December 31, 2007
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable	$	19,627		24,203
Current installments of long-term debt		15,925		17,250
Current installments of obligations under capital leases		1,087		1,100
Accounts payable		14,701		14,970
Deferred revenue		6,799		6,321
Billings in excess of costs and estimated earnings on uncompleted contracts		961		1,621
Accrued wages and compensated absences		10,369		11,782
Accrued lease costs for assets held for sale (note 2)		3,479		6,331
Due to third party payers		3,538		3,901
Deferred income taxes		3,004		3,030
Other accrued liabilities		14,046		11,590
Total current liabilities		93,536		102,099
Long-term debt, less current installments		75,682		75,611
Obligations under capital leases, less current installments		612		1,140
Deferred income taxes		26,443		28,159
Other liabilities		19,113		20,523
Total liabilities		215,386		227,532
Stockholders' equity (notes 3, 4, and 5):
Preferred stock, $1 par value.  Authorized 5,000,000 shares, none issued		--		--
Common stock, $.06 par value. Authorized 16,000,000 shares; issued 12,217,979 and 12,136,879 shares at June 30, 2008, and December 31, 2007, respectively		733		728
Additional paid-in capital		78,372		76,698
Retained earnings		71,758		64,594
Total stockholders' equity		150,863		142,020
Total liabilities and stockholders’ equity	$	366,249		369,552

See accompanying notes to unaudited consolidated financial statements.

2

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Revenue:
Flight revenue, net	$	124,746			89,695			239,219			168,856
Sales of medical interiors and products		3,213			1,038			6,839			3,335
		127,959			90,733			246,058			172,191
Operating expenses:
Flight centers		52,980			37,244			105,120			72,794
Aircraft operations		30,454			17,419			57,520			32,663
Aircraft rental		11,721			6,019			22,800			11,826
Cost of medical interiors and products sold		2,341			386			5,344			2,126
Depreciation and amortization		4,202			3,479			8,300			6,890
Gain on disposition of assets, net		(130	)		(497	)		(1,438	)		(345	)
General and administrative		17,578			12,568			34,724			24,719
		119,146			76,618			232,369			150,673
Operating income		8,813			14,115			13,689			21,518
Other income (expense):
Interest expense		(1,106	)		(1,318	)		(2,673	)		(2,740	)
Other, net		609			491			1,252			946
Income before income taxes		8,316			13,288			12,268			19,724
Income tax expense		(3,482	)		(5,463	)		(5,104	)		(8,201	)
Net income	$	4,834			7,825			7,164			11,523
Basic income per common share (note 5)	$	.40			.66			.59			.97
Diluted income per common share (note 5)	$	.38			.63			.57			.93
Weighted average number of common shares outstanding – basic		12,181,790			11,886,613			12,166,566			11,881,751
Weighted average number of common shares outstanding – diluted		12,608,043			12,431,098			12,617,804			12,382,830

See accompanying notes to unaudited consolidated financial statements.

3

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	7,164			11,523
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		8,300			6,890
Deferred income tax expense (benefit)		4,461			(1,853	)
Stock-based compensation		1,040			1,104
Tax benefit from exercise of stock options		--			(68	)
Gain on disposition of assets, net		(1,438	)		(345	)
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets		(194	)		(124	)
Decrease in receivables		12,152			1,698
Increase in inventories		(2,250	)		(1,402	)
Increase in work-in-process on medical interiors and costs in excess of billings		(3,332	)		(767	)
Increase (decrease) in accounts payable, other accrued liabilities, and other liabilities		(2,215	)		4,992
Increase (decrease) in deferred revenue and billings in excess of costs		(182	)		882
Net cash provided by operating activities		23,506			22,530
Cash flows from investing activities:
Acquisition of property and equipment		(22,856	)		(9,238	)
Proceeds from disposition and sale of equipment and assets held for sale		6,303			1,529
Increase in notes receivable and other assets		(1,286	)		(2,686	)
Net cash used in investing activities		(17,839	)		(10,395	)
				(Continued)

4

Air Methods Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(Amounts in thousands)

(unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from financing activities:
Proceeds from issuance of common stock, net	$	639			103
Tax benefit from exercise of stock options		--			68
Net borrowings (payments) under line of credit		5,531			(8,099	)
Proceeds from issuance of long-term debt		--			1,573
Payments for debt issue costs		(71	)		(46	)
Payments of long-term debt		(6,785	)		(4,932	)
Payments of capital lease obligations		(541	)		(839	)
Net cash used in financing activities		(1,227	)		(12,172	)
Increase (decrease) in cash and cash equivalents		4,440			(37	)
Cash and cash equivalents at beginning of period		5,134			4,219
Cash and cash equivalents at end of period	$	9,574			4,182
Interest paid in cash during the period	$	2,327			2,775
Income taxes paid in cash during the period	$	276			4,593

Non-cash investing and financing activities:

In the six months ended June 30, 2008, the Company settled notes payable of $24,203 in exchange for the aircraft securing the debt. The Company also entered into notes payable of $19,627 to finance the purchase of aircraft which are held for sale as of June 30, 2008.

In the six months ended June 30, 2008, the Company made adjustments to the preliminary purchase price allocation related to the acquisition of FSS Airholdings, Inc., which increased goodwill by $2,126. See Note 2 for further detail on the adjustments.

In the six months ended June 30, 2007, the Company settled notes payable of $9,560 in exchange for the aircraft securing the debt. The Company also entered into notes payable of $19,100 to finance the purchase of aircraft which were held for sale as of June 30, 2007.

Effective January 1, 2007, the Company implemented FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, resulting in an increase of $561 in deferred tax assets and in the January 1, 2007, balance of retained earnings.

See accompanying notes to unaudited consolidated financial statements.

5

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company considers its critical accounting policies involving more significant judgments and estimates to be those related to revenue recognition, deferred income taxes, depreciation and residual values, and fair values of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.

(2) Acquisition of Subsidiary

On October 1, 2007, the Company acquired all of the outstanding stock of FSS Airholdings, Inc. (FSS), the parent company of CJ Systems Aviation Group (CJ) for total consideration of $25 million. The Company also incurred $179,000 in costs related to the transaction, primarily consisting of payments to third party consultants and legal fees. The purchase price was financed through borrowings under the Company’s Revolving Credit, Term Loan and Security Agreement with a commercial bank group. The Company assumed $11,169,000 of CJ’s long-term debt, $10,337,000 of which was paid off immediately following the acquisition. The results of FSS’s operations have been included with those of the Company since October 1, 2007.

The allocation of the purchase price was as follows (amounts in thousands):

	Preliminary Allocation			Adjustments			Revised Allocation
Assets purchased:
Receivables	$	28,763			(2,945	)		25,818
Equipment and other property		14,490			(369	)		14,121
Aircraft		5,589			--			5,589
Inventory		3,547			--			3,547
Goodwill		13,722			2,126			15,848
Other		11,243			1,443			12,686
		77,354			255			77,609
Long-term debt		(11,169	)		--			(11,169	)
Other liabilities assumed		(41,006	)		(255	)		(41,261	)
Total liabilities assumed		(52,175	)		(255	)		(52,430	)
Purchase price	$	25,179			--			25,179

6

Air Methods Corporation and Subsidiaries

Notes to Consolidated Financial Statements, continued

(unaudited)

(2) Acquisition of Subsidiary, continued

Adjustments to the purchase price allocation during the six months ended June 30, 2008, consisted primarily of revised estimates of the fair value of certain receivables and of liabilities related to aircraft repair costs. Revisions were based upon clarification of the payer mix comprising CBS receivables and obtaining historical collection data as of the acquisition date. In addition, the Company verified open account balances with HBS customers and open repair orders and warranty claims with aircraft parts vendors. Although the process of verifying open account balances is not yet complete, the Company does not expect future adjustments to the purchase price allocation to be significant.

At acquisition, the Company identified fourteen CJ aircraft subject to operating leases which it intends to sell within one year. One was sold during 2007. As of December 31, 2007, the liability for lease expense through the expected sales dates and the expected difference between the estimated sales prices and the lease buyouts was $6,331,000. During the six months ended June 30, 2008, the liability was reduced by lease payments of $960,000. Three of the aircraft were sold during the period, and two were acquired from the leasing companies and are held for sale as of June 30, 2008. The accrual was reduced by the related liability balance of $1,892,000, consisting primarily of the expected shortfall between the sales prices and the lease buyouts. As of June 30, 2008, the liability balance related to the eight remaining aircraft was $3,479,000.

(3) Stockholders’ Equity

Changes in stockholders’ equity for the six months ended June 30, 2008, consisted of the following (amounts in thousands except share amounts):

	Shares Outstanding		Amount
Balances at January 1, 2008		12,136,879	$	142,020
Issuance of common shares for options exercised		44,500		639
Stock-based compensation		36,600		1,040
Net income		--		7,164
Balances at June 30, 2008		12,217,979	$	150,863

(4) Stock-based Compensation

The Company recognized $532,000 and $1,040,000 in stock-based compensation expense during the quarter and six months ended June 30, 2008, respectively, and $351,000 and $1,104,000 during the quarter and six months ended June 30, 2007, respectively. During the six months ended June 30, 2008, the Company issued 36,600 shares of restricted stock at a weighted average fair value of $46.98 and options to purchase 25,000 shares at a weighted average fair value of $15.52. The restricted shares vest over a weighted average life of 2.1 years and are subject to a restriction on the transfer of the shares for one year following the vesting date. Restricted shares of 6,800 became vested during the six months ended June 30, 2008. During the six months ended June 30, 2007, options to purchase 194,500 shares were granted at a weighted average fair value of $9.37. During the six months ended June 30, 2008 and 2007, options to purchase 44,500 and 12,000 shares were exercised with aggregate intrinsic values totaling approximately $1,317,000 and $194,000, respectively.

7

Air Methods Corporation and Subsidiaries

Notes to Consolidated Financial Statements, continued

(unaudited)

(5)           Income per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by all common shares outstanding during the period and dilutive potential common shares.

The reconciliation of basic to diluted weighted average common shares outstanding is as follows:

	2008		2007
For quarter ended June 30:
Weighted average number of common shares outstanding – basic		12,181,790		11,886,613
Dilutive effect of:
Common stock options		422,668		460,817
Common stock warrants		--		83,668
Unvested restricted stock		3,585		--
Weighted average number of common shares outstanding – diluted		12,608,043		12,431,098
For six months ended June 30:
Weighted average number of common shares outstanding – basic		12,166,566		11,881,751
Dilutive effect of:
Common stock options		449,189		419,180
Common stock warrants		--		81,899
Unvested restricted stock		2,049		--
Weighted average number of common shares outstanding – diluted		12,617,804		12,382,830

Common stock options of 38,500 were not included in the diluted income per share calculation for the quarter and six months ended June 30, 2008, because their effect would have been anti-dilutive.

(6) New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (Statement 159), which provides an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements. Statement 159 permits an election to measure eligible items at fair value on an instrument-by-instrument basis and then report unrealized gains and losses for those items in earnings. Statement 159 is effective for fiscal years beginning after November 15, 2007. The implementation of Statement 159 effective January 1, 2008, did not have a material effect on the Company’s financial position or results of operations because the Company did not elect to measure any eligible items at fair value.

In December 2007 the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations, (Statement 141R). Statement 141R establishes principles and requirements for recognizing and measuring assets acquired (including goodwill), liabilities assumed, and any noncontrolling interest acquired in a business combination. Statement 141R also provides guidance regarding information to be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.

8

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

 (6) New Accounting Pronouncements, continued

In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement under FASB Statement No. 142, Goodwill and Other Intangible Assets, to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead requires an entity to consider its own historical experience in renewing similar arrangements. This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.

 (7) Business Segment Information

Summarized financial information for the Company’s operating segments is shown in the following table (amounts in thousands). Amounts in the “Corporate Activities” column represent corporate headquarters expenses, corporate income tax expense, and results of insignificant operations. The Company does not allocate assets between operating segments for internal reporting and performance evaluation purposes. Operating segments and their principal products or services are as follows:

· Community-Based Services (CBS) - provides air medical transportation services to the general population as an independent service in 21 states. Services include aircraft operation and maintenance, medical care, dispatch and communications, and medical billing and collection.

· Hospital-Based Services (HBS) - provides air medical transportation services to hospitals in 32 states and the District of Columbia under exclusive operating agreements. Services include aircraft operation and maintenance.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers.

For quarter ended June 30:	CBS			HBS			Products Division			Corporate Activities			Intersegment Eliminations			Consolidated
2008
External revenue	$	77,746			47,015			3,198			--			--			127,959
Intersegment revenue		108			--			5,996			--			(6,104	)		--
Total revenue		77,854			47,015			9,194			--			(6,104	)		127,959
Operating expenses, excluding depreciation & amortization		(64,518	)		(43,620	)		(7,748	)		(4,409	)		5,351			(114,944	)
Depreciation & amortization		(2,181	)		(1,713	)		(151	)		(157	)		--			(4,202	)
Interest expense		(494	)		(563	)		--			(49	)		--			(1,106	)
Other income, net		569			--			--			40			--			609
Income tax expense		--			--			--			(3,482	)		--			(3,482	)
Segment net income (loss)	$	11,230			1,119			1,295			(8,057	)		(753	)		4,834
2007
External revenue	$	61,846			27,860			1,027			--			--			90,733
Intersegment revenue		36			--			5,385			--			(5,421	)		--
Total revenue		61,882			27,860			6,412			--			(5,421	)		90,733
Operating expenses, excluding depreciation & amortization		(45,505	)		(24,569	)		(5,249	)		(2,587	)		4,771			(73,139	)
Depreciation & amortization		(1,846	)		(1,389	)		(148	)		(96	)		--			(3,479	)
Interest expense		(657	)		(610	)		--			(51	)		--			(1,318	)
Other income, net		473			--			--			18			--			491
Income tax expense		--			--			--			(5,463	)		--			(5,463	)
Segment net income (loss)	$	14,347			1,292			1,015			(8,179	)		(650	)		7,825

9

Air Methods Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(unaudited)

(7)           Business Segment Information, continued

For six months ended June 30:	CBS			HBS			Products Division			Corporate Activities			Intersegment Eliminations			Consolidated
2008
External revenue	$	147,063			92,266			6,729			--			--			246,058
Intersegment revenue		108			--			9,962			--			(10,070	)		--
Total revenue		147,171			92,266			16,691			--			(10,070	)		246,058
Operating expenses, excluding depreciation & amortization		(125,730	)		(84,632	)		(13,790	)		(8,179	)		8,262			(224,069	)
Depreciation & amortization		(4,312	)		(3,385	)		(296	)		(307	)		--			(8,300	)
Interest expense		(1,240	)		(1,301	)		--			(132	)		--			(2,673	)
Other income, net		1,156			--			--			96			--			1,252
Income tax expense		--			--			--			(5,104	)		--			(5,104	)
Segment net income (loss)	$	17,045			2,948			2,605			(13,626	)		(1,808	)		7,164
2007
External revenue	$	115,245			53,632			3,314			--			--			172,191
Intersegment revenue		36			473			8,979			--			(9,488	)		--
Total revenue		115,281			54,105			12,293			--			(9,488	)		172,191
Operating expenses, excluding depreciation & amortization		(88,900	)		(46,970	)		(9,758	)		(5,997	)		7,842			(143,783	)
Depreciation & amortization		(3,660	)		(2,747	)		(296	)		(187	)		--			(6,890	)
Interest expense		(1,366	)		(1,259	)		--			(115	)		--			(2,740	)
Other income, net		910			--			--			36			--			946
Income tax expense		--			--			--			(8,201	)		--			(8,201	)
Segment net income (loss)	$	22,265			3,129			2,239			(14,464	)		(1,646	)		11,523

10

ITEM 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations

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; successful integration of CJ; 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 2008, the CBS Division generated 60% of our total revenue, compared to 67% in the first six months of 2007.

· 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 65% of total contract revenue) and hourly flight fees (approximately 35% of total contract revenue) billed to hospital customers. In the six months ended June 30, 2008, the HBS Division generated 37% of our total revenue, compared to 31% in the six months ended June 30, 2007.

· Products Division - designs, manufactures, and installs aircraft medical interiors and other aerospace and medical transport products for domestic and international customers. The Products Division generated 3% of our total revenue in the six months ended June 30, 2008, compared to 2% in 2007.

See Note 7 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 35% of HBS revenue. By contrast, 77% 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 2008 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 11,600 and 22,200 for the quarter and six months ended June 30, 2008, respectively, compared to approximately 9,800 and 18,100 for the quarter and six months ended June 30, 2007, respectively. Patient transports for CBS bases open longer than one year (Same-Base Transports) were approximately 8,700 and 16,200 in the quarter and six months ended June 30, 2008, respectively, compared to approximately 9,400 and 17,400 in the quarter and six months ended June 30, 2007, respectively. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 459, or 24.5%, and 1,095 or 27.5%, higher in the quarter and six months ended June 30, 2008, respectively, compared to 2007.

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· 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 14.3% in the six months ended June 30, 2008, compared to 2007, contributing to an increase of 4.0% 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 June 30,		For six months ended June 30,
	2008	2007	2008	2007
Gross billings	100%	100%	100%	100%
Provision for contractual discounts	33%	29%	34%	31%
Provision for uncompensated care	22%	22%	21%	20%

The increase in the total percentage of uncollectible accounts for 2008 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. Five models of aircraft within our fleet, representing 30% 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, 2007, we have taken delivery of 43 new aircraft and have the option to purchase 22 additional aircraft through the end of 2008. We plan to replace discontinued models and other older aircraft with the new aircraft expected to be delivered under these options, as well as to provide 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 increased 72.9% and 77.4% for the quarter and six months ended June 30, 2008, respectively, compared to 2007, while total flight volume for CBS and HBS operations increased 24.4% and 30.5% for the quarter and six months ended June 30,  2008, compared to 2007. During the quarter and six months ended June 30, 2008, we incurred costs for 40 and 71 engine overhauls, respectively, compared to 25 and 37 overhauls in the quarter and six months ended June 30, 2007, respectively. The increase is primarily attributed to the timing of overhaul cycles, as well as to the acquisition of CJ. The acquisition of CJ resulted in an increase in the percentage of our fleet comprised of twin-engine aircraft, which tend to have higher maintenance costs than single-engine 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.

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· Fuel costs. Both the cost and availability of fuel are influenced by many economic and political factors and events occurring in oil-producing countries throughout the world, and fuel costs fluctuate widely. The price per barrel of oil has maintained near record levels over the past several years. We cannot predict the future cost and availability of fuel. Generally, our HBS customers pay for all fuel consumed in medical flights. However, our ability to pass on increased fuel costs for CBS operations may be limited by economic and competitive conditions and by reimbursement rates established by Medicare, Medicaid, and insurance providers. We do not currently have any agreements in place to hedge our fuel costs. The cost of aircraft fuel per hour flown for CBS operations increased approximately 69.5% and 57.3% in the quarter and six months ended June 30,  2008, compared to 2007.

· Aircraft availability. The recent high rate of growth in the air medical transportation and other helicopter services industries has generated strong demand for new models of helicopters. Quality used aircraft are also in short supply worldwide. We have endeavored to mitigate the shortage of suitable aircraft primarily through long-term arrangements with a single aircraft manufacturer which provides us options to purchase up to ten aircraft each year for the next several years. We also have a purchase commitment with another manufacturer for fifteen aircraft, with deliveries scheduled to begin in 2009, as well as options for an additional fifteen aircraft in future years.

· 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. Deploying multiple aircraft in a market may also serve as a barrier to entry for lower cost providers.

· 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. Employees who meet these standards are in great demand and are likely to remain a limited resource in the foreseeable future. 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. Other employee groups may also elect to be represented by unions in the future.

Results of Operations

We reported net income of $4,834,000 and $7,164,000 for the quarter and six months ended June 30, 2008, respectively, compared to $7,825,000 and $11,523,000 for the quarter and six months ended June 30, 2007, respectively. The quarter and six months ended June 30, 2008, included results of operations for CJ locations. Same-Base Transports for CBS operations were 7.0% lower in the quarter and six months ended June 30, 2008, compared to 2007, primarily because of  increases of 24.5% and $27.5%, respectively, in cancellations of flights due to unfavorable weather conditions for these bases. Aircraft operating expenses increased 74.8% and 76.1% for the quarter and six months ended June 30, 2008, respectively, mainly due to the acquisition of CJ but also reflecting higher maintenance costs on older models of aircraft and higher fuel costs.

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

Net flight revenue increased $35,051,000, or 39.1%, and $70,363,000, or 41.7%, for the quarter and six months ended June 30, 2008, respectively, compared to 2007. Flight revenue is generated by both CBS and HBS operations and is recorded net of provisions for contractual discounts and uncompensated care.

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· CBS – Net flight revenue increased $15,896,000, or 25.7%, to $77,731,000 for the second quarter of 2008 and $31,731,000, or 27.5%, to $146,956,000 for the six months ended June 30, 2008, for the following reasons:

· Net revenue of $11,323,000 and $23,249,000 from CJ’s CBS operations during the quarter and six months ended June 30, 2008, respectively.

· Increases of 16.7% and 14.3% in average gross charge per transport for the quarter and six months ended June 30, 2008, respectively, compared to 2007. Net reimbursement per transport increased approximately 4.9% and 4.0%, over the same periods.

· Incremental net revenue of $6,917,000 and $12,059,000 for the quarter and six months ended June 30, 2008, respectively, generated from the addition of fourteen new CBS bases either during or subsequent to the first six months of 2007.

· Closure of three bases subsequent to the second quarter of 2007 and the conversion of another base to HBS operations during the first quarter of 2007, resulting in decreases in net revenue of approximately $1,981,000 and $3,805,000 during the quarter and six months ended June 30, 2008, respectively.

· Decrease of 7.0% in Same-Base Transports for the quarter and six months ended June 30, 2008, compared to 2007. Cancellations due to unfavorable weather conditions for CBS bases open longer than one year were 24.5% and 27.5% higher in the quarter and six months ended June 30, 2008, respectively, compared to 2007.

· HBS – Net flight revenue increased $19,155,000, or 68.8%, to $47,015,000 for the second quarter of 2008 and $38,632,000, or 72.0%, to $92,263,000 for the six months ended June 30, 2008, for the following reasons:

· Net revenue of $16,107,000 and $31,474,000 from CJ’s HBS operations during the quarter and six months ended June 30, 2008, respectively.

· Incremental net revenue of $3,347,000 and $6,830,000 for the quarter and six months ended June 30, 2008, generated from the addition of three new contracts, the expansion of three contracts, and the conversion of one base from CBS operations during or subsequent to the first six months of 2007.

· Cessation of service under three contracts and the conversion of one contract to CBS operations subsequent to the first six months of 2007, resulting in decreases in net revenue of approximately $2,062,000 and $3,100,000 for the quarter and six months ended June 30, 2008, 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 8.0% and 2.3% in flight volume for the quarter and six months ended June 30, 2008, respectively, for all contracts excluding the CJ contracts, new contracts, contract expansions, and closed contracts discussed above.

Flight center costs (consisting primarily of pilot, mechanic, and medical staff salaries and benefits) increased $15,736,000, or 42.3%, and $32,326,000, or 44.4%, for the quarter and six months ended June 30, 2008, respectively, compared to 2007. Flight center costs included an increase of approximately $593,000 in workers compensation expense for the quarter and six months ended June 30, 2008, respectively, as a result of two fatal accidents experienced during the second quarter. Changes by business segment are as follows:

· CBS – Flight center costs increased $7,927,000, or 32.1%, to $32,630,000 for the second quarter of 2008 and $16,804,000, or 34.9%, to $64,928,000 for the six months ended June 30, 2008, for the following reasons:

· Flight center costs of approximately $5,889,000 and $11,894,000 related to CJ’s CBS operations for the quarter and six months ended June 30, 2008, respectively.

· Increases of approximately $2,212,000 and $5,016,000 for the quarter and six months ended June 30, 2008, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $773,000 and $1,535,000 for the quarter and six months ended June 30, 2008, respectively, due to the closure of base locations described above.

· Increases in salaries for merit pay raises.

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· HBS - Flight center costs increased $7,809,000, or 62.3%, to $20,350,000 for the second quarter of 2008 and $15,522,000, or 62.9%, to $40,192,000 for the six months ended June 30, 2008, primarily due to the following:

· Flight center costs of approximately $7,011,000 and $14,074,000 related to CJ’s HBS operations for the quarter and six months ended June 30, 2008, respectively.

· Increases of approximately $1,585,000 and $2,774,000 for the quarter and six months ended June 30, 2008, respectively, for the addition of personnel to staff new base locations described above.

· Decreases of approximately $955,000 and $1,573,000 for the quarter and six months ended June 30, 2008, respectively, due to the closure of base locations described above.

· Increases in salaries for merit pay raises.

Aircraft operating expenses increased $13,035,000, or 74.8%, and $24,857,000, or 76.1%, for the quarter and six months ended June 30, 2008, respectively, in comparison to the quarter and six months ended June 30, 2007. 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:

· Aircraft operating expenses of $8,547,000 and $15,696,000 related to CJ’s operations for the quarter and six months ended June 30, 2008.

· Increases of $2,730,000, or 21.3%, and $6,743,000, or 28.0%, for the quarter and six months ended June 30, 2008, respectively, in the cost of aircraft maintenance, excluding the effect of aircraft added as a result of the CJ acquisition and other aircraft added to the fleet during or subsequent to the first six months of 2007. Since the first six months of 2007, we have placed 49 new aircraft into service and eliminated twelve aircraft which were older models. Maintenance costs per hour on newer aircraft has remained relatively constant on an annual basis. Maintenance costs 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. During the quarter and six months ended June 30, 2008, we incurred costs for 40 and 71 engine overhauls, respectively, compared to 25 and 37 overhauls in the quarter and six months ended June 30, 2007, respectively. The increase is primarily attributed to the timing of overhaul cycles and to the acquisition of CJ.

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

· Increases of approximately 69.5% and 57.3% in the cost of aircraft fuel per hour flown for the quarter and six months ended June 30, 2008, respectively.

· Decrease in hull insurance rates effective July 2007.

Aircraft rental expense increased $5,702,000, or 94.7%, and $10,974,000, or 92.8%, for the quarter and six months ended June 30, 2008, respectively, in comparison to the prior year. Expense for CJ aircraft under operating leases totaled approximately $4,281,000 and $8,643,000 for the quarter and six months ended June 30, 2008, respectively. Incremental rental expense incurred for 33 other leased aircraft added to our fleet during either 2007 or 2008 totaled $2,471,000 and $4,311,000 for the quarter and six months ended June 30, 2008, respectively. The increase for new aircraft was offset in part by selling two aircraft and refinancing six at lower lease rates or through debt financing during 2007.

Products Division

Sales of medical interiors and products increased $2,171,000, or 211.4%, and $3,415,000, or 103.0%, for the quarter and six months ended June 30, 2008, respectively, compared to 2007. Significant projects in 2008 included seven modular 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 litter systems for the U.S. Army’s Medical Evacuation Vehicle (MEV). Revenue by product line for the quarter and six months ended June 30, 2008, was as follows:

· $1,220,000 and $2,038,000 - multi-mission interiors

· $1,414,000 and $3,169,000 - modular medical interiors

· $579,000 and $1,632,000 - other aerospace and medical transport products

Significant projects in 2007 included production of 27 MEV litter systems, which were nearly complete as of June 30, 2007, and five modular medical interior kits for commercial customers. Revenue by product line for the quarter and six months ended June 30, 2007, was as follows:

· $258,000 and $551,000 - multi-mission interiors

· $503,000 and $1,081,000 - modular medical interiors

· $277,000 and $1,703,000 - other aerospace and medical transport products

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Cost of medical interiors and products increased $1,955,000, or 506.5%, and $3,217,000, or 151.3%, for the quarter and six months ended June 30, 2008, respectively, as compared to the prior year, due partly to the change in sales volume. The average net margin earned on projects during 2008 was 11.3% for the second quarter and 11.5% for the six-month period compared to 33.4% for the second quarter and 25.0% for the six-month period in 2007, reflecting increases in the cost of raw materials used to manufacture our aircraft interior systems and the change in product mix. Margins earned on multi-mission interiors and other governmental contracts are generally higher than margins earned on medical interiors for commercial customers. In addition, costs in 2008 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

Depreciation and amortization expense increased $723,000, or 20.8%, and $1,410,000, or 20.5%, for the quarter and six months ended June 30, 2008, respectively, compared to 2007. Depreciation on assets acquired in the CJ transaction totaled approximately $840,000 and $1,610,000 for the quarter and six months ended June 30, 2008, respectively.

General and administrative (G&A) expenses increased $5,010,000, or 39.9%, and $10,005,000, or 40.5%, for the quarter and six months ended June 30, 2008, respectively, compared to 2007, reflecting the impact of the CJ acquisition and increases in compensation for merit pay raises. 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 13.7% and 14.1% of revenue for the quarter and six months ended June 30, 2008, respectively, compared to 13.9% and 14.4% for the quarter and six months ended June 30, 2007, respectively. We increased staffing for G&A departments over 9% in the fourth quarter of 2007 to manage the expanded operations with the acquisition of CJ. G&A expenses also included approximately $505,000 and $1,195,000 for the quarter and six months ended June 30, 2008, related to the consolidation of CJ’s Part 135 Air Carrier Certificate into the Air Methods certificate; the consolidation was completed during the second quarter of 2008. In addition, the first and second quarters of 2008 reflect the costs of staffing and maintaining our operational control center at corporate headquarters, which was established during the second quarter of 2007 to enable us to track flight plans and flight conditions for all aircraft and to communicate with our pilots en route.

Interest expense decreased $212,000, or 16.1%, and $67,000, or 2.4%, in the quarter and six months ended June 30, 2008, respectively, compared to 2007. During the third and fourth quarters 2007, we entered into new notes and capital lease obligations of $28,352,000, primarily related to the CJ acquisition, with a weighted average interest rate of 7.5%. In addition, the average balance outstanding against our line of credit was $17.1 million in the first six months of 2008 compared to $13.1 million in the first six months of 2007. These increases were offset by regularly scheduled payments of long-term debt and a decrease of over 300 basis points in the weighted average interest rate paid on variable rate debt in the first six months of 2008 compared to the first six months of 2007. During the six months ended June 30, 2008, we also paid approximately $1,949,000 in balloon payments on promissory notes secured by aircraft.

Income tax expense was $3,482,000 and $5,104,000 in the quarter and six months ended June 30, 2008, respectively, and $5,463,000 and $8,201,000 in the quarter and six months ended June 30, 2007, respectively. The effective tax rate was approximately 41% for all periods.

Liquidity and Capital Resources

Our working capital position as of June 30, 2008, was $107,432,000, compared to $112,758,000 at December 31, 2007. We had cash and cash equivalents of $9,574,000 at June 30, 2008, compared to $5,134,000 at December 31, 2007. Cash generated by operations was $23,506,000 in 2008, compared to $22,530,000 in 2007, reflecting the change in operating results described above. In addition, receivables for refundable income taxes of $20,669,000 at December 31, 2007, were either received during the six-month period or offset by estimated income taxes payable for 2008 operations.

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Cash used by investing activities totaled $17,839,000 in 2008 compared to $10,395,000 in 2007. 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. These CJ aircraft had been identified for disposition upon acquisition of CJ in October 2007. We also sold four other aircraft during the period for total proceeds of $2.4 million. Equipment acquisitions in 2007 included a $1.5 million aircraft, as well as medical interior and avionics installations and information systems hardware and software. We also paid approximately $1.1 million in deposits for future aircraft purchases and $1.9 million related to the purchase of certain business assets from air medical service providers in Florida and South Carolina. In 2007 we also sold two aircraft for total proceeds of approximately $1.5 million.

Financing activities used $1,227,000 in 2008 compared to $12,172,000 in 2007. In 2008 we used additional draws against our line of credit to fund the buyout of leased aircraft, as discussed above, as well as regular operations. The primary use of cash in both 2008 and 2007 was regularly scheduled payments of long-term debt and capital lease obligations. In 2007 we also used cash generated by operations to pay down the balance outstanding against our line of credit.

Effective July 31, 2008, we amended our senior credit facility to allow for up to $25 million in repurchases of the Company’s common stock through December 31, 2008.

Outlook for 2008

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

We opened a new base in the southwest region during the first quarter of 2008 and expect to open one in the Midwest during the third quarter. We also expect to close three bases in the southeast region during the third quarter of 2008 due to insufficient flight volume. We continue to explore opportunities for base expansion in each of our geographic regions. We increased prices for our CBS operations an average of approximately 6% effective January 1, 2008; 7% effective May 1, 2008; and 6% effective July 1, 2008.

Hospital-Based Services

Five customers expanded to satellite locations during the first six months of 2008. We expect to add three other satellite locations with existing hospital customers during the third quarter of 2008. Eighteen hospital contracts are due for renewal in 2008, three of which have been renewed for terms ranging from one to three years. Three other contracts were allowed to expire during the first or second quarters of 2008. Renewals on all other contracts are still pending.

Products Division

As of June 30, 2008, thirty-five HH60L units, fifty MEV units, and three commercial medical interiors were in process. We also have two design contracts with the U.S. Army: one for an upgraded HH-60M multi-mission interior and one for an interim medical system. Deliveries under all contracts in process are expected to be completed by the end of 2009, and remaining revenue is estimated at $13.2 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 35 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.

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All Segments

There can be no assurance that we will successfully integrate CJ operations into the CBS and HBS divisions, 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 2008. We also have approximately $26.4 million in borrowing capacity available under our revolving credit facility and cash balances of $9.6 million as of June 30, 2008.

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 depreciation and residual values. 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 programs are very complex and subject to interpretation. We also provide services to patients who have no insurance or other third-party payer coverage. There can be no guarantee that we will continue to experience the same collection rates that we have in the past. If actual future collections are more or less than those projected by management, adjustments to allowances for contractual discounts and uncompensated care may be required. Based on related flight revenue for the six months ended June 30, 2008, a change of 100 basis points in the percentage of estimated contractual discounts and uncompensated care would have resulted in a change of approximately $3,260,000 in flight revenue.

Revenue related to fixed fee medical interior and products contracts is recorded as costs are incurred using the percentage of completion method of accounting. We estimate the percentage of completion based on costs incurred to date as a percentage of an estimate of the total costs to complete the project. Losses on contracts in process are recognized when determined. If total costs to complete a project are greater or less than estimated, the gross margin on the project may be greater or less than originally recorded under the percentage of completion method.

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Deferred Income Taxes

In preparation of the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciable assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recoverable from future taxable income and record a valuation allowance for those amounts we believe are not likely to be realized. Establishing or increasing a valuation allowance in a period increases income tax expense. We consider estimated future taxable income, tax planning strategies, and the expected timing of reversals of existing temporary differences in assessing the need for a valuation allowance against deferred tax assets. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. The effect on deferred income tax assets and liabilities of a change in statutory tax rates applicable to the Company is also recognized in income in the period of the change.

Depreciation and Residual Values

In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values and the potential for impairment. Estimates of useful lives and residual values of aircraft are based upon actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations and changes in our maintenance program or operations could  result in changes to these estimates. Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. All of our sales and related receivables are payable in U.S. dollars. We are subject to interest rate risk on our debt obligations and notes receivable, some of which have fixed interest rates, except $22,143,000 outstanding against the line of credit and $50,000,000 in notes payable. Based on the amounts outstanding at June 30, 2008, the annual impact of a change of 100 basis points in interest rates would be approximately $721,000. Interest rates on these instruments approximate current market rates as of June 30, 2008.

Our cost of operations is also affected by changes in the price and availability of aircraft fuel. Generally, our HBS customers pay for all fuel consumed in medical flights. Based on actual CBS fuel usage for the six months ended June 30, 2008, the impact on operating costs of an increase of 10% in the cost of aircraft fuel per hour flown would be approximately $854,000 for the six-month period. Flight volume for CBS operations tends to be lower during the first and fourth quarters, compared to the second and third quarters, due to weather conditions and other factors. Therefore, the impact of a change in fuel cost based on six-month volume is not necessarily indicative of the impact on subsequent quarters. We do not currently have any agreements in place to hedge our fuel costs.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officers (referred to in this report as the Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Management, under the supervision and with the participation of the Certifying Officers, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2008, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of June 30, 2008, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2007.

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

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

31.1 Chief Executive Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Chief Financial Officer Certification adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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.

	AIR METHODS CORPORATION
Date:  August 8, 2008	By	/s/ Aaron D. Todd
		Aaron D. Todd
		Chief Executive Officer
Date:  August 8, 2008	By	/s/ Trent J. Carman
		Trent J. Carman
		Chief Financial Officer
Date:  August 8, 2008	By	/s/ Sharon J. Keck
		Sharon J. Keck
		Chief Accounting Officer

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