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
                September 30,
  2008





OR








 ̈
            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   ̈





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  ̈
              
              Accelerated
      Filer xNon-accelerated
      Filer  ̈  (Do
      not check if a smaller reporting company)
              
              Smaller reporting company ̈





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


Yes  ̈  No x





The
number of shares of Common Stock, par value $.06 per share, outstanding as of
October 24, 2008, was 12,136,779.













TABLE OF CONTENTS








PART
      I.
                                  FINANCIAL INFORMATIONItem
      1.
                                  Consolidated Financial StatementsConsolidated Balance Sheets – September 30, 2008 and December
      31, 2007 (unaudited)
                                  1Consolidated Statements of Operations for the three and nine
      months ended September 30, 2008 and 2007 (unaudited)
                                  3Consolidated Statements of Cash Flows for the nine months
      ended September 30, 2008 and 2007 (unaudited)
                                  4Notes to Consolidated Financial Statements
      (unaudited)
                                  6Item
      2.
                                  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                  11Item
      3.
                                  Quantitative and Qualitative Disclosures about Market
      Risk
                                  20Item
      4.
                                  Controls and Procedures
                                  20PART
      II.
                                  OTHER INFORMATIONItem
      1.
                                  Legal Proceedings
                                  20Item
      1A.
                                  Risk Factors
                                  20Item
      2.
                                  Changes in Securities
                                  21Item
      3.
                                  Defaults upon Senior Securities
                                  21Item
      4.
                                  Submission of Matters to a Vote of Security
      Holders
                                  21Item
      5.
                                  Other Information
                                  21Item
      6.
                                  Exhibits
                                  21SIGNATURES
                                  22








Table of Contents





PART
I: FINANCIAL INFORMATION





Item
1. Consolidated Financial Statements





Air
Methods Corporation and Subsidiaries





CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share amounts)


(unaudited)





September
      30,
                            2008
                          
                          
                          December
      31,
                            2007AssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          9,171
                          
                          
                          
                          5,134Current
      installments of notes receivable
                          
                          
                          752
                          
                          
                          
                          881Receivables:Trade,
      net
                          
                          
                          140,584
                          
                          
                          
                          135,633Refundable
      income taxes
                          
                          
                          --
                          
                          
                          
                          20,669Other
                          
                          
                          2,544
                          
                          
                          
                          2,760Total
      receivables
                          
                          
                          143,128
                          
                          
                          
                          159,062Inventories
                          
                          
                          18,977
                          
                          
                          
                          15,241Work-in-process
      on medical interiors and products contracts
                          
                          
                          3,412
                          
                          
                          
                          1,395Assets
      held for sale
                          
                          
                          25,516
                          
                          
                          
                          25,865Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                          
                          
                          5,730
                          
                          
                          
                          3,457Prepaid
      expenses and other
                          
                          
                          4,491
                          
                          
                          
                          3,822Total
      current assets
                          
                          
                          211,177
                          
                          
                          
                          214,857Property
      and equipment:Land
                          
                          
                          251
                          
                          
                          
                          251Flight
      and ground support equipment
                          
                          
                          197,812
                          
                          
                          
                          179,123Furniture
      and office equipment
                          
                          
                          20,557
                          
                          
                          
                          16,475218,620
                          
                          
                          
                          195,849Less
      accumulated depreciation and amortization
                          
                          
                          (88,696
                          )
                          
                          
                          (81,103
                          )Net
      property and equipment
                          
                          
                          129,924
                          
                          
                          
                          114,746Goodwill
      (note 2)
                          
                          
                          20,291
                          
                          
                          
                          20,307Notes
      receivable, less current installments
                          
                          
                          679
                          
                          
                          
                          1,251Other
      assets, net of accumulated amortization of $2,202 and $1,959 at September
      30, 2008 and December 31, 2007, respectively
                          
                          
                          20,127
                          
                          
                          
                          18,391Total
      assets
                          
                          $
                          382,198
                          
                          
                          
                          369,552





(Continued)





1
 Table of Contents





Air
Methods Corporation and Subsidiaries





CONSOLIDATED
BALANCE SHEETS, Continued


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


(unaudited)





September
      30,
                      2008
                    
                    
                    December
      31,
                      2007Liabilities and Stockholders'
      EquityCurrent
      liabilities:Notes
      payable
                    
                    $
                    22,831
                    
                    
                    
                    24,203Current
      installments of long-term debt
                    
                    
                    17,030
                    
                    
                    
                    17,250Current
      installments of obligations under capital leases
                    
                    
                    1,326
                    
                    
                    
                    1,100Accounts
      payable
                    
                    
                    15,428
                    
                    
                    
                    14,970Deferred
      revenue
                    
                    
                    7,360
                    
                    
                    
                    6,321Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                    
                    
                    976
                    
                    
                    
                    1,621Accrued
      wages and compensated absences
                    
                    
                    13,909
                    
                    
                    
                    11,782Accrued
      lease costs for assets held for sale (note 2)
                    
                    
                    --
                    
                    
                    
                    6,331Due
      to third party payers
                    
                    
                    3,090
                    
                    
                    
                    3,901Deferred
      income taxes
                    
                    
                    9,735
                    
                    
                    
                    3,030Other
      accrued liabilities
                    
                    
                    13,559
                    
                    
                    
                    11,590Total
      current liabilities
                    
                    
                    105,244
                    
                    
                    
                    102,099Long-term
      debt, less current installments
                    
                    
                    64,726
                    
                    
                    
                    75,611Obligations
      under capital leases, less current installments
                    
                    
                    1,567
                    
                    
                    
                    1,140Deferred
      income taxes
                    
                    
                    27,075
                    
                    
                    
                    28,159Other
      liabilities
                    
                    
                    25,633
                    
                    
                    
                    20,523Total
      liabilities
                    
                    
                    224,245
                    
                    
                    
                    227,532Stockholders'
      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 12,262,179 and
      12,136,879 shares at September 30, 2008, and December 31, 2007,
      respectively; outstanding 12,134,979 and 12,136,879 shares at September
      30, 2008, and December 31, 2007, respectively
                    
                    
                    736
                    
                    
                    
                    728Additional
      paid-in capital
                    
                    
                    79,995
                    
                    
                    
                    76,698Retained
      earnings
                    
                    
                    80,127
                    
                    
                    
                    64,594Treasury
      stock at cost, 100,000 shares at September 30, 2008
                    
                    
                    (2,905
                    )
                    
                    
                    --Total
      stockholders' equity
                    
                    
                    157,953
                    
                    
                    
                    142,020Total
      liabilities and stockholders’ equity
                    
                    $
                    382,198
                    
                    
                    
                    369,552





See
accompanying notes to unaudited consolidated financial statements.





2
 Table of Contents





Air
Methods Corporation and Subsidiaries





CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(unaudited)





Three
      Months Ended
                          September
      30,
                        
                        
                        Nine
      Months Ended
                          September
      30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Revenue:Flight
      revenue, net
                        
                        $
                        131,079
                        
                        
                        
                        98,587
                        
                        
                        
                        370,298
                        
                        
                        
                        267,443Sales
      of medical interiors and products
                        
                        
                        2,753
                        
                        
                        
                        2,962
                        
                        
                        
                        9,592
                        
                        
                        
                        6,297133,832
                        
                        
                        
                        101,549
                        
                        
                        
                        379,890
                        
                        
                        
                        273,740Operating
      expenses:Flight
      centers
                        
                        
                        52,504
                        
                        
                        
                        38,398
                        
                        
                        
                        157,624
                        
                        
                        
                        111,193Aircraft
      operations
                        
                        
                        33,628
                        
                        
                        
                        19,482
                        
                        
                        
                        91,148
                        
                        
                        
                        52,145Aircraft
      rental
                        
                        
                        12,293
                        
                        
                        
                        6,327
                        
                        
                        
                        35,093
                        
                        
                        
                        18,153Cost
      of medical interiors and products sold
                        
                        
                        1,716
                        
                        
                        
                        1,944
                        
                        
                        
                        7,059
                        
                        
                        
                        4,070Depreciation
      and amortization
                        
                        
                        4,328
                        
                        
                        
                        3,395
                        
                        
                        
                        12,628
                        
                        
                        
                        10,285Gain
      on disposition of assets, net
                        
                        
                        (1,130
                        )
                        
                        
                        (1,201
                        )
                        
                        
                        (2,568
                        )
                        
                        
                        (1,546
                        )General
      and administrative
                        
                        
                        15,947
                        
                        
                        
                        12,861
                        
                        
                        
                        50,671
                        
                        
                        
                        37,579119,286
                        
                        
                        
                        81,206
                        
                        
                        
                        351,655
                        
                        
                        
                        231,879Operating
      income
                        
                        
                        14,546
                        
                        
                        
                        20,343
                        
                        
                        
                        28,235
                        
                        
                        
                        41,861Other
      income (expense):Interest
      expense
                        
                        
                        (1,270
                        )
                        
                        
                        (1,169
                        )
                        
                        
                        (3,943
                        )
                        
                        
                        (3,909
                        )Loss
      on early extinguishment of debt
                        
                        
                        --
                        
                        
                        
                        (757
                        )
                        
                        
                        --
                        
                        
                        
                        (757
                        )Other,
      net
                        
                        
                        928
                        
                        
                        
                        612
                        
                        
                        
                        2,180
                        
                        
                        
                        1,558Income
      before income taxes
                        
                        
                        14,204
                        
                        
                        
                        19,029
                        
                        
                        
                        26,472
                        
                        
                        
                        38,753Income
      tax expense
                        
                        
                        5,835
                        
                        
                        
                        7,838
                        
                        
                        
                        10,939
                        
                        
                        
                        16,039Net
      income
                        
                        $
                        8,369
                        
                        
                        
                        11,191
                        
                        
                        
                        15,533
                        
                        
                        
                        22,714Basic
      income per common share (note 5)
                        
                        $
                        .69
                        
                        
                        
                        .94
                        
                        
                        
                        1.28
                        
                        
                        
                        1.91Diluted
      income per common share (note 5)
                        
                        $
                        .67
                        
                        
                        
                        .89
                        
                        
                        
                        1.23
                        
                        
                        
                        1.82Weighted
      average number of common shares outstanding – basic
                        
                        
                        12,179,714
                        
                        
                        
                        11,954,332
                        
                        
                        
                        12,170,980
                        
                        
                        
                        11,906,211Weighted
      average number of common shares outstanding – diluted
                        
                        
                        12,522,932
                        
                        
                        
                        12,542,816
                        
                        
                        
                        12,590,252
                        
                        
                        
                        12,448,801





See
accompanying notes to unaudited consolidated financial statements.





3
 Table of Contents





Air
Methods Corporation and Subsidiaries





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)


(unaudited)




Nine
      Months Ended September 30,2008
                                  
                                  
                                  2007Cash
      flows from operating activities:Net
      income
                                  
                                  $
                                  15,533
                                  
                                  
                                  
                                  22,714Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
                                  
                                  
                                  12,628
                                  
                                  
                                  
                                  10,285Deferred
      income tax expense
                                  
                                  
                                  5,363
                                  
                                  
                                  
                                  (990
                                  )Stock-based
      compensation
                                  
                                  
                                  1,624
                                  
                                  
                                  
                                  1,467Tax
      benefit from exercise of stock options
                                  
                                  
                                  (567
                                  )
                                  
                                  
                                  (588
                                  )Gain
      on disposition of assets, net
                                  
                                  
                                  (2,568
                                  )
                                  
                                  
                                  (1,546
                                  )Loss
      on early extinguishment of debt
                                  
                                  
                                  --
                                  
                                  
                                  
                                  757Changes
      in assets and liabilities:Increase
      in prepaid expenses and other current assets
                                  
                                  
                                  (669
                                  )
                                  
                                  
                                  (580
                                  )Decrease
      (increase) in receivables
                                  
                                  
                                  12,986
                                  
                                  
                                  
                                  (7,030
                                  )Increase
      in inventories
                                  
                                  
                                  (3,736
                                  )
                                  
                                  
                                  (916
                                  )Increase
      in work-in-process on medical interiors and costs in excess of
      billings
                                  
                                  
                                  (4,290
                                  )
                                  
                                  
                                  (1,376
                                  )Increase
      in accounts payable, other accrued liabilities, and other
      liabilities
                                  
                                  
                                  7,620
                                  
                                  
                                  
                                  8,290Increase
      in deferred revenue and billings in excess of costs
                                  
                                  
                                  394
                                  
                                  
                                  
                                  1,351Net
      cash provided by operating activities
                                  
                                  
                                  44,318
                                  
                                  
                                  
                                  31,838Cash
      flows from investing activities:Acquisition
      of property and equipment
                                  
                                  
                                  (40,715
                                  )
                                  
                                  
                                  (13,866
                                  )Proceeds
      from disposition and sale of equipment
                                  
                                  
                                  14,486
                                  
                                  
                                  
                                  4,852Increase
      in notes receivable and other assets
                                  
                                  
                                  (631
                                  )
                                  
                                  
                                  (2,864
                                  )Net
      cash used by investing activities
                                  
                                  
                                  (26,860
                                  )
                                  
                                  
                                  (11,878
                                  )Cash
      flows from financing activities:Proceeds
      from issuance of common stock, net
                                  
                                  
                                  1,114
                                  
                                  
                                  
                                  1,483Purchases
      of common stock
                                  
                                  
                                  (2,905
                                  )
                                  
                                  
                                  --Tax
      benefit from exercise of stock options
                                  
                                  
                                  567
                                  
                                  
                                  
                                  588Net
      borrowings (repayments) under line of credit
                                  
                                  
                                  919
                                  
                                  
                                  
                                  (11,135
                                  )Proceeds
      from issuance of long-term debt
                                  
                                  
                                  --
                                  
                                  
                                  
                                  26,573Payments
      for debt issue costs
                                  
                                  
                                  (145
                                  )
                                  
                                  
                                  (618
                                  )Payments
      of long-term debt
                                  
                                  
                                  (12,024
                                  )
                                  
                                  
                                  (29,434
                                  )Debt
      retirement costs
                                  
                                  
                                  --
                                  
                                  
                                  
                                  (112
                                  )Payments
      of capital lease obligations
                                  
                                  
                                  (947
                                  )
                                  
                                  
                                  (1,047
                                  )Net
      cash used by financing activities
                                  
                                  
                                  (13,421
                                  )
                                  
                                  
                                  (13,702
                                  )Increase
      in cash and cash equivalents
                                  
                                  
                                  4,037
                                  
                                  
                                  
                                  6,258Cash
      and cash equivalents at beginning of period
                                  
                                  
                                  5,134
                                  
                                  
                                  
                                  4,219Cash
      and cash equivalents at end of period
                                  
                                  $
                                  9,171
                                  
                                  
                                  
                                  10,477Interest
      paid in cash during the year
                                  
                                  $
                                  3,592
                                  
                                  
                                  
                                  4,176Income
      taxes paid in cash during the year
                                  
                                  $
                                  312
                                  
                                  
                                  
                                  12,444




(Continued)





4
 Table of Contents





Air
Methods Corporation and Subsidiaries





CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued


(Amounts
in thousands)


(unaudited)








Non-cash
investing and financing activities:





In the
nine months ended September 30, 2008, the Company entered into capital lease
obligations of $1,600 to finance the purchase of equipment.





In the
nine months ended September 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 $22,831 to finance the purchase of aircraft which are held
for sale as of September 30, 2008.





In the
nine months ended September 30, 2008, the Company made adjustments to the
preliminary purchase price allocation related to the acquisition of FSS
Airholdings, Inc., which decreased goodwill by $16. See Note 2 for further
detail on the adjustments.





In the
nine months ended September 30, 2007, the Company wrote off $645 in debt
origination costs related to the refinancing of certain term loans and its line
of credit.





In the
nine months ended September 30, 2007, the Company entered into capital lease
obligations of $552 to finance the purchase of equipment.





In the
nine months ended September 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 $15,540 to finance the purchase of aircraft which were
held for sale as of September 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
 Table of Contents





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
                    AllocationAssets
      purchased:Receivables
                  
                  $
                  28,763
                  
                  
                  
                  (2,945
                  )
                  
                  
                  25,818Equipment
      and other property
                  
                  
                  14,490
                  
                  
                  
                  (369
                  )
                  
                  
                  14,121Aircraft
                  
                  
                  5,589
                  
                  
                  
                  --
                  
                  
                  
                  5,589Inventory
                  
                  
                  3,547
                  
                  
                  
                  --
                  
                  
                  
                  3,547Goodwill
                  
                  
                  13,722
                  
                  
                  
                  (16
                  )
                  
                  
                  13,706Other
                  
                  
                  11,243
                  
                  
                  
                  15
                  
                  
                  
                  11,25877,354
                  
                  
                  
                  (3,315
                  )
                  
                  
                  74,039Long-term
      debt
                  
                  
                  (11,169
                  )
                  
                  
                  --
                  
                  
                  
                  (11,169
                  )Other
      liabilities assumed
                  
                  
                  (41,006
                  )
                  
                  
                  3,315
                  
                  
                  
                  (37,691
                  )Total
      liabilities assumed
                  
                  
                  (52,175
                  )
                  
                  
                  3,315
                  
                  
                  
                  (48,860
                  )Purchase
      price
                  
                  $
                  25,179
                  
                  
                  
                  --
                  
                  
                  
                  25,179





6
 Table of Contents





Air
Methods Corporation and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements, continued


(unaudited)





(2)
            Acquisition of
      Subsidiary, continued





Adjustments
to the purchase price allocation during the nine months ended September 30,
2008, included 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.





The
Company also made revisions to the purchase price allocation based on changes to
its plan for CJ aircraft targeted for disposition. At acquisition, the Company
identified fourteen CJ aircraft subject to operating leases which it intended 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 nine months ended September 30, 2008, the liability was
reduced by lease payments of $869,000. Three of the aircraft were sold during
the period, and two were acquired from the leasing companies and are held for
sale as of September 30, 2008. During the quarter ended September 30, 2008, the
Company determined that the remaining eight aircraft were necessary to support
current operations and would not be sold within the original one-year period.
The aircraft were used to support base expansions while new aircraft were still
in the process of being retrofitted for service and to respond to the request
from the Federal Emergency Management Agency to deploy up to 25 aircraft in
response to hurricanes along the Gulf Coast during the third quarter of 2008.
Based on the decision to use these aircraft in current operations, the remaining
amount of lease payments reserved and the estimated loss accrued in purchase
accounting totaling $3,570,000 related to these eight aircraft was reversed with
a corresponding reduction in goodwill during the nine months ended September 30,
2008.





(3)
            Stockholders’
      Equity





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





Shares
                    Outstanding
                  
                  
                  AmountBalances
      at January 1, 2008
                  
                  
                  12,136,879
                  
                  
                  $
                  142,020Issuance
      of common shares for options exercised
                  
                  
                  86,500
                  
                  
                  
                  1,114Purchase
      of treasury shares
                  
                  
                  (100,000
                  )
                  
                  
                  (2,905
                  )Tax
      benefit from exercise of stock options
                  
                  
                  --
                  
                  
                  
                  567Stock-based
      compensation
                  
                  
                  11,600
                  
                  
                  
                  1,624Net
      income
                  
                  
                  --
                  
                  
                  
                  15,533Balances
      at September 30, 2008
                  
                  
                  12,134,979
                  
                  
                  $
                  157,953





7
 Table of Contents





Air
Methods Corporation and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements, continued


(unaudited)





(4)
            Stock-based
      Compensation





The
Company recognized $584,000 and $1,624,000 in stock-based compensation expense
during the quarter and nine months ended September 30, 2008, respectively, and
$362,000 and $1,467,000 in stock-based compensation expense during the quarter
and nine months ended September 30, 2007, respectively. During the nine months
ended September 30, 2008, the Company issued 38,800 shares of restricted stock
at a weighted average fair value of $45.82 and options to purchase 27,500 shares
at a weighted average fair value of $15.02. The restricted shares vest over a
weighted average life of 2.0 years and are subject to a restriction on the
transfer of the shares for one year following the vesting date. Restricted
shares of 11,600 became vested during the nine months ended September 30, 2008.
During the nine months ended September 30, 2007, options to purchase 208,000
shares were granted at a weighted average fair value of $9.74. During the nine
months ended September 30, 2008 and 2007, options to purchase 86,500 and 84,833
shares were exercised with aggregate intrinsic values totaling approximately
$2,116,000 and $2,310,000, respectively.





(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 and dilutive potential common shares outstanding during the
period. The reconciliation
of basic to diluted weighted average common shares outstanding is as
follows:





2008
                  
                  
                  2007For
      quarter ended September 30:Weighted
      average number of common shares outstanding – basic
                  
                  
                  12,179,714
                  
                  
                  
                  11,954,332Dilutive
      effect of:Common
      stock options
                  
                  
                  337,059
                  
                  
                  
                  531,275Common
      stock warrants
                  
                  
                  --
                  
                  
                  
                  57,209Unvested
      restricted stock
                  
                  
                  6,159
                  
                  
                  
                  --Weighted
      average number of common shares outstanding – diluted
                  
                  
                  12,522,932
                  
                  
                  
                  12,542,816For
      nine months ended September 30:Weighted
      average number of common shares outstanding – basic
                  
                  
                  12,170,980
                  
                  
                  
                  11,906,211Dilutive
      effect of:Common
      stock options
                  
                  
                  416,676
                  
                  
                  
                  468,231Common
      stock warrants
                  
                  
                  --
                  
                  
                  
                  74,359Unvested
      restricted stock
                  
                  
                  2,596
                  
                  
                  
                  --Weighted
      average number of common shares outstanding – diluted
                  
                  
                  12,590,252
                  
                  
                  
                  12,448,801





Common
stock options of 38,500 were not included in the diluted income per share
calculation for the quarter and nine months ended September 30, 2008, because
their effect would have been anti-dilutive. Common stock options of 13,500 were
not included in the diluted income per share calculation for the quarter and
nine months ended September 30, 2007, because their effect would have been
anti-dilutive.





8
 Table of Contents





Air
Methods Corporation and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements, continued


(unaudited)





(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.





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.





In May
2008 the FASB issued FASB Statement No. 162 (Statement 162), Hierarchy of Generally Accepted
Accounting Principles. Statement 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements and is effective November 15, 2008. The
Company does not expect the adoption of this statement to have an impact on its
financial position or results of operations, as this new standard codifies,
rather than changes, existing generally accepted accounting
principles.





(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 20 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 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.





9
 Table of Contents





Air
Methods Corporation and Subsidiaries


Notes
to Unaudited Consolidated Financial Statements, continued


(unaudited)





(7)
            Business Segment
      Information, continued





For
      quarter ended September 30:
              
              CBS
              
              
              HBS
              
              
              Products
                Division
              
              
              Corporate
                Activities
              
              
              Intersegment
                Eliminations
              
              
              Consolidated2008External
      revenue
              
              $
              82,511
              
              
              
              48,580
              
              
              
              2,741
              
              
              
              --
              
              
              
              --
              
              
              
              133,832Intersegment
      revenue
              
              
              54
              
              
              
              --
              
              
              
              6,527
              
              
              
              --
              
              
              
              (6,581
              )
              
              
              --Total
      revenue
              
              
              82,565
              
              
              
              48,580
              
              
              
              9,268
              
              
              
              --
              
              
              
              (6,581
              )
              
              
              133,832Operating
      expenses
              
              
              (63,947
              )
              
              
              (45,048
              )
              
              
              (7,013
              )
              
              
              (4,180
              )
              
              
              5,230
              
              
              
              (114,958
              )Depreciation
      & amortization
              
              
              (1,429
              )
              
              
              (2,530
              )
              
              
              (153
              )
              
              
              (216
              )
              
              
              --
              
              
              
              (4,328
              )Interest
      expense
              
              
              (569
              )
              
              
              (609
              )
              
              
              --
              
              
              
              (92
              )
              
              
              --
              
              
              
              (1,270
              )Other
      income, net
              
              
              877
              
              
              
              --
              
              
              
              --
              
              
              
              51
              
              
              
              --
              
              
              
              928Income
      tax expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (5,835
              )
              
              
              --
              
              
              
              (5,835
              )Segment
      net income (loss)
              
              $
              17,497
              
              
              
              393
              
              
              
              2,102
              
              
              
              (10,272
              )
              
              
              (1,351
              )
              
              
              8,3692007External
      revenue
              
              $
              69,237
              
              
              
              29,410
              
              
              
              2,902
              
              
              
              --
              
              
              
              --
              
              
              
              101,549Intersegment
      revenue
              
              
              18
              
              
              
              --
              
              
              
              4,913
              
              
              
              --
              
              
              
              (4,931
              )
              
              
              --Total
      revenue
              
              
              69,255
              
              
              
              29,410
              
              
              
              7,815
              
              
              
              --
              
              
              
              (4,931
              )
              
              
              101,549Operating
      expenses
              
              
              (46,658
              )
              
              
              (25,820
              )
              
              
              (5,886
              )
              
              
              (3,308
              )
              
              
              3,861
              
              
              
              (77,811
              )Depreciation
      & amortization
              
              
              (2,103
              )
              
              
              (1,036
              )
              
              
              (147
              )
              
              
              (109
              )
              
              
              --
              
              
              
              (3,395
              )Interest
      expense
              
              
              (589
              )
              
              
              (516
              )
              
              
              --
              
              
              
              (64
              )
              
              
              --
              
              
              
              (1,169
              )Loss
      on early extinguishment of debt
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (757
              )
              
              
              
              
              
              
              (757
              )Other
      income, net
              
              
              565
              
              
              
              --
              
              
              
              --
              
              
              
              47
              
              
              
              --
              
              
              
              612Income
      tax expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (7,838
              )
              
              
              --
              
              
              
              (7,838
              )Segment
      net income (loss)
              
              $
              20,470
              
              
              
              2,038
              
              
              
              1,782
              
              
              
              (12,029
              )
              
              
              (1,070
              )
              
              
              11,191





For
      nine months ended September 30:2008External
      revenue
                            
                            $
                            229,574
                            
                            
                            
                            140,846
                            
                            
                            
                            9,470
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            379,890Intersegment
      revenue
                            
                            
                            162
                            
                            
                            
                            --
                            
                            
                            
                            16,489
                            
                            
                            
                            --
                            
                            
                            
                            (16,651
                            )
                            
                            
                            --Total
      revenue
                            
                            
                            229,736
                            
                            
                            
                            140,846
                            
                            
                            
                            25,959
                            
                            
                            
                            --
                            
                            
                            
                            (16,651
                            )
                            
                            
                            379,890Operating
      expenses
                            
                            
                            (189,677
                            )
                            
                            
                            (129,680
                            )
                            
                            
                            (20,803
                            )
                            
                            
                            (12,359
                            )
                            
                            
                            13,492
                            
                            
                            
                            (339,027
                            )Depreciation
      & amortization
                            
                            
                            (5,741
                            )
                            
                            
                            (5,915
                            )
                            
                            
                            (449
                            )
                            
                            
                            (523
                            )
                            
                            
                            --
                            
                            
                            
                            (12,628
                            )Interest
      expense
                            
                            
                            (1,809
                            )
                            
                            
                            (1,910
                            )
                            
                            
                            --
                            
                            
                            
                            (224
                            )
                            
                            
                            --
                            
                            
                            
                            (3,943
                            )Other
      income, net
                            
                            
                            2,033
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            147
                            
                            
                            
                            --
                            
                            
                            
                            2,180Income
      tax expense
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (10,939
                            )
                            
                            
                            --
                            
                            
                            
                            (10,939
                            )Segment
      net income (loss)
                            
                            $
                            34,542
                            
                            
                            
                            3,341
                            
                            
                            
                            4,707
                            
                            
                            
                            (23,898
                            )
                            
                            
                            (3,159
                            )
                            
                            
                            15,5332007External
      revenue
                            
                            $
                            184,482
                            
                            
                            
                            83,042
                            
                            
                            
                            6,216
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            273,740Intersegment
      revenue
                            
                            
                            54
                            
                            
                            
                            473
                            
                            
                            
                            13,892
                            
                            
                            
                            --
                            
                            
                            
                            (14,419
                            )
                            
                            
                            --Total
      revenue
                            
                            
                            184,536
                            
                            
                            
                            83,515
                            
                            
                            
                            20,108
                            
                            
                            
                            --
                            
                            
                            
                            (14,419
                            )
                            
                            
                            273,740Operating
      expenses
                            
                            
                            (135,558
                            )
                            
                            
                            (72,790
                            )
                            
                            
                            (15,644
                            )
                            
                            
                            (9,305
                            )
                            
                            
                            11,703
                            
                            
                            
                            (221,594
                            )Depreciation
      & amortization
                            
                            
                            (5,763
                            )
                            
                            
                            (3,783
                            )
                            
                            
                            (443
                            )
                            
                            
                            (296
                            )
                            
                            
                            --
                            
                            
                            
                            (10,285
                            )Interest
      expense
                            
                            
                            (1,955
                            )
                            
                            
                            (1,775
                            )
                            
                            
                            --
                            
                            
                            
                            (179
                            )
                            
                            
                            --
                            
                            
                            
                            (3,909
                            )Loss
      on early extinguishment of debt
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (757
                            )
                            
                            
                            
                            
                            
                            
                            (757
                            )Other
      income, net
                            
                            
                            1,475
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            83
                            
                            
                            
                            --
                            
                            
                            
                            1,558Income
      tax expense
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (16,039
                            )
                            
                            
                            --
                            
                            
                            
                            (16,039
                            )Segment
      net income (loss)
                            
                            $
                            42,735
                            
                            
                            
                            5,167
                            
                            
                            
                            4,021
                            
                            
                            
                            (26,493
                            )
                            
                            
                            (2,716
                            )
                            
                            
                            22,714





10
 Table of Contents





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; size,
structure and growth of our air medical services and products markets;
integration of CJ into our existing operations; flight volume and collection
rates for CBS operations; 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, 2008, the
      CBS Division generated 60% of our total revenue, decreasing from 68% in
      the nine months ended September 30,
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 nine months ended September 30, 2008, the HBS
      Division generated 37% of our total revenue, increasing from 30% in the
      nine months ended September 30,
2007.


·
            Products
      Division - designs, manufactures, and installs aircraft medical interiors
      and other aerospace and medical transport products for domestic and
      international customers. Products Division generated 3% of our total
      revenue in the nine months ended September 30, 2008, compared to 2% in the
      nine months ended September 30,
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, 76% of
      our costs primarily associated with flight operations (including salaries,
      aircraft ownership costs, hull insurance, and general and administrative
      expenses) incurred during the nine months ended September 30, 2008, were
      mainly fixed in nature. While flight volume is affected by many factors,
      including competition, overall economic conditions, 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 10,690 and
      32,898 for the quarter and nine months ended September 30, 2008,
      respectively, compared to 10,466 and 28,519 for the quarter and nine
      months ended September 30, 2007, respectively. Patient transports for CBS
      bases open longer than one year (Same-Base Transports) were 8,397 and
      24,592 in the quarter and nine months ended September 30, 2008,
      respectively, compared to 9,949 and 27,372 in the quarter and nine months
      ended September 30, 2007, respectively.Cancellations due to
      unfavorable weather conditions for CBS bases open longer than one year
      were 422, or 19.1%, and 1,517 or 24.5%, higher in the quarter and nine
      months ended September 30, 2008, respectively, compared to 2007. We
      believe that Same-Base Transports in 2008 were also negatively
      affectedby a
      third-quarter spike in fuel prices which decreased road traffic volume,
      overall weakening economic conditions in the United States, and lost
      flights due to redeployment of numerous aircraft and crews to respond to
      Hurricanes Gustav and Ike.





11
 Table of Contents





·
            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 20.8% and 16.2% in the quarter and nine
      months ended September 30, 2008, compared to 2007, contributing to
      increases of 7.4% and 5.0% in net reimbursement per transport in the
      quarter and nine months ended September 30, 2008, compared to the nine
      months ended September 30, 2007. Provisions for contractual discounts and
      estimated uncompensated care for CBS operations are as
      follows:





For
      quarters ended
                    September
      30,
                  
                  
                  For
      nine months ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Gross
      billings
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %Provision
      for contractual discounts
                  
                  
                  33
                  %
                  
                  
                  31
                  %
                  
                  
                  34
                  %
                  
                  
                  31
                  %Provision
      for uncompensated care
                  
                  
                  21
                  %
                  
                  
                  20
                  %
                  
                  
                  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 29% 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 54
      new aircraft and have the option to purchase 12 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 67.8% and 73.7%
      for the quarter and nine months ended September 30, 2008, respectively,
      compared to 2007, while total flight volume for CBS and HBS operations
      increased 23.6% and 36.9% for the quarter and nine months ended September
      30, 2008, compared to 2007. During the quarter and nine months ended
      September 30, 2008, we incurred costs for 25 and 96 engine overhauls,
      respectively, compared to 10 and 45 overhauls in the quarter and nine
      months ended September 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 typically remains 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.





12
 Table of Contents





·
            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 55.8% and 55.9% in the quarter and nine months ended
      September 30,  2008, compared to
2007.





·
            Aircraft availability.
      The high growth rate during the past several years in the air medical
      transportation and other helicopter services industries generated strong
      demand for new models of helicopters. Quality used aircraft have also been
      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. The recent slowdown in global economies may
      result in increased aircraft availability as demand
    weakens.





·
            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 (CBA) on
      March 31, 2006. The agreement is effective January 1, 2006, through April
      30, 2009. Negotiations on a new CBA are scheduled to commence in the
      fourth quarter of 2008. Other employee groups may also elect to be
      represented by unions in the
future.








RESULTS OF OPERATIONS





We reported net income of
$8,369,000 and $15,533,000 for the three and nine months ended September 30,
2008, respectively, compared to net income of $11,191,000 and $22,714,000 for
the three and nine months ended September 30, 2007, respectively.The
quarter and nine months ended September 30, 2008, included results of operations
for CJ locations. Net income for the quarter
and nine months ended September 30, 2007, included a pre-tax loss on early
extinguishment of debt of $757,000 (with a tax effect of approximately
$310,000).Same-Base Transports for CBS operations were 1,552, or 15.6%,
and 2,780, or 10.2%, lower in the quarter and nine months ended September 30,
2008, compared to 2007, partly because of increases of 422, or 19.1%, and 1,517,
or 24.5%, respectively, in cancellations of flights due to unfavorable weather
conditions for these bases; a third-quarter spike in
fuel prices which decreased road traffic volume; and overall weakening economic
conditions in the United States. Aircraft operating expenses increased
72.6% and 74.8% for the quarter and nine months ended September 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
$32,492,000, or 33.0%, and $102,855,000, or 38.5%, for the quarter and nine
months ended September 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.





13
 Table of Contents





·
            CBS
      – Net flight revenue increased $13,274,000, or 19.2%, to $82,499,000 for
      the third quarter of 2008 and $45,005,000, or 24.4%, to $229,455,000 for
      the nine months ended September 30, 2008, for the following
      reasons:


·
            Net
      revenue of $10,810,000 and $34,059,000 from CJ’s CBS operations during the
      quarter and nine months ended September 30, 2008,
      respectively.


·
            Increases
      of 20.8% and 16.2% in average gross charge per transport for the quarter
      and nine months ended September 30, 2008, respectively, compared to 2007.
      Net reimbursement per transport increased approximately 7.4% and 5.0%,
      over the same periods.


·
            Incremental
      net revenue of $2,460,000 and $14,519,000 for the quarter and nine months
      ended September 30, 2008, respectively, generated from the addition of
      fourteen new CBS bases either during or subsequent to the nine months
      ended September 30, 2007.


·
            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 (FEMA) in disaster recovery efforts. During the third quarter of
      2008, we mobilized 25 and 15 aircraft and crews to respond to the threat
      posed by Hurricanes Gustav and Ike, respectively, along the Gulf Coast.
      During the quarter and nine months ended September 30, 2007, we recognized
      net revenue of $992,000 pursuant to the same
  contract.


·
            Closure
      of four bases during either 2007 or 2008 and the conversion of another
      base to HBS operations during the first quarter of 2007, resulting in
      decreases in net revenue of approximately $1,021,000 and $5,290,000 during
      the quarter and nine months ended September 30, 2008,
      respectively.


·
            Decreases
      of 1,552, or
      15.6%, and 2,780, or 10.2%,in Same-Base
      Transports for the quarter and nine months ended September 30, 2008,
      compared to 2007. Cancellations due to unfavorable weather conditions for
      CBS bases open longer than one year were 422, or 19.1%, and
      1,517, or 24.5%,higher in the
      quarter and nine months ended September 30, 2008, respectively, compared
      to 2007. The remaining decline in Same-Base Transports is believed to be
      attributable to other factors, including a third-quarter
      spike in fuel prices which decreased road traffic volume, overall economic
      conditions in the United States, and lost flights due to redeployment of
      numerous aircraft and crews to respond to Hurricanes Gustav and
      Ike.





·
            HBS
      – Net flight revenue increased $19,218,000, or 65.5%, to $48,580,000 for
      the third quarter of 2008 and $57,850,000, or 69.7%, to $140,843,000 for
      the nine months ended September 30, 2008, for the following
      reasons:


·
            Net
      revenue of $15,938,000 and $47,412,000 from CJ’s HBS operations during the
      quarter and nine months ended September 30, 2008,
      respectively.


·
            Incremental
      net revenue of $4,034,000 and $10,943,000 for the quarter and nine months
      ended September 30, 2008, generated from the addition of three new
      contracts, the expansion of five contracts, and the conversion of one base
      from CBS operations during 2007 or
2008.


·
            Cessation of service
      under three contracts and the conversion of one contract to CBS operations
      during 2007 or 2008, resulting in decreases in net revenue of
      approximately $1,748,000 and $4,849,000 for the quarter and nine months
      ended September 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 11.4% and 5.6% in flight volume for the quarter and nine months ended
      September 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 $14,106,000, or 36.7%, and $46,431,000, or 41.8%, for the
quarter and nine months ended September 30, 2008, respectively, compared to
2007. Flight center costs included an increase of approximately $593,000 in
workers compensation expense for the nine months ended September 30, 2008, as a
result of two fatal accidents experienced during the second quarter. Changes by
business segment are as follows:





14
 Table of Contents





·
            CBS
      – Flight center costs increased $6,826,000, or 26.4%, to $32,677,000 and
      $23,630,000, or 31.9%, to $97,605,000 for the quarter and nine months
      ended September 30, 2008, respectively, for the following
      reasons:


·
            Flight
      center costs of approximately $5,222,000 and $17,116,000 related to CJ’s
      CBS operations for the quarter and nine months ended September 30, 2008,
      respectively.


·
            Increases
      of approximately $2,115,000 and $7,132,000 for the quarter and nine months
      ended September 30, 2008, respectively, for the addition of personnel to
      staff new base locations described
above.


·
            Decreases
      of approximately $717,000 and $2,298,000 for the quarter and nine months
      ended September 30, 2008, respectively, due to the closure of base
      locations described above.


·
            Increases
      in salaries for merit pay raises.





·
            HBS
      - Flight center costs increased $7,280,000, or 58.0%, to $19,827,000 and
      $22,801,000, or 61.3%, to $60,019,000 for the quarter and nine months
      ended September 30, 2008, respectively, primarily due to the
      following:


·
            Flight
      center costs of approximately $6,396,000 and $20,470,000 related to CJ’s
      HBS operations for the quarter and nine months ended September 30, 2008,
      respectively.


·
            Increases
      of approximately $1,297,000 and $4,132,000 for the quarter and nine months
      ended September 30, 2008, respectively, for the addition of personnel to
      staff new base locations described
above.


·
            Decreases
      of approximately $772,000 and $2,345,000 for the quarter and nine months
      ended September 30, 2008, respectively, due to the closure of base
      locations described above.


·
            Increases
      in salaries for merit pay raises.





Aircraft operating expenses
increased $14,146,000, or 72.6%, and $39,003,000, or 74.8%, for the quarter and
nine months ended September 30, 2008, respectively, in comparison to 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 increase in costs is due to the
following:


·
            Aircraft
      operating expenses of $9,119,000 and $24,815,000 related to CJ’s
      operations for the quarter and nine months ended September 30,
      2008.


·
            Increases
      of $2,835,000, or 19.0%, and $9,578,000, or 24.6%, for the quarter and
      nine months ended September 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 2007 or
      2008. During 2007 and 2008, we have placed 54 new aircraft into service
      and eliminated fourteen 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 nine months ended September 30, 2008, we incurred costs for 25
      and 96 engine overhauls, respectively, compared to 10 and 45 overhauls in
      the quarter and nine months ended September 30, 2007, respectively. The
      increase is primarily attributed to the timing of overhaul cycles and 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 55.8% and 55.9% in the cost of aircraft fuel per hour
      flown for CBS operations for the quarter and nine months ended September
      30, 2008, respectively.


·
            Increase
      in hull insurance rates effective July
2008.





Aircraft rental expense
increased $5,966,000, or 94.3%, and $16,940,000, or 93.3%, for the quarter and
nine months ended September 30, 2008, respectively, in comparison to the quarter
and nine months ended September 30, 2007. Expense for CJ aircraft under
operating leases totaled approximately $4,692,000 and $13,335,000 for the
quarter and nine months ended September 30, 2008, respectively. Incremental
rental expense incurred for 44 other leased aircraft added to our fleet during
either 2007 or 2008 totaled $2,760,000 and $7,071,000 for the quarter and nine
months ended September 30, 2008, respectively. The increase for new aircraft was
offset in part by selling two aircraft and refinancing eleven at lower lease
rates or through debt financing during 2007 and 2008.





15
 Table of Contents





Products
Division





Sales of medical interiors and
productsdecreased $209,000, or 7.1%, for the third quarter of 2008 but
increased $3,295,000, or 52.3%, for the nine months ended September 30, 2008,
compared to 2007. Significant projects in 2008 included nine modular 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 litter systems for the U.S. Army’s Medical
Evacuation Vehicle (MEV). Revenue by product line for the quarter and nine
months ended September 30, 2008, was as follows:


·
            $1,295,000
      and $3,333,000 - multi-mission
interiors


·
            $874,000
      and $4,043,000 - modular medical
interiors


·
            $584,000
      and $2,216,000 - other aerospace and medical transport
      products





Significant
projects in 2007 included production of 27 MEV units and nine modular medical
interior kits for commercial customers. During the third quarter, we also began
production of ten HH-60L units. Revenue by product line for the quarter and nine
months ended September 30, 2007, respectively, was as follows:


·
            $1,094,000
      and $1,645,000 - multi-mission
interiors


·
            $1,675,000
      and $2,756,000 - modular medical
interiors


·
            $193,000
      and $1,896,000 - other aerospace
products





Cost of medical interiors and
products decreased $228,000, or 11.7%, for the third quarter of 2008 and
increased $2,989,000, or 73.4%, for the nine months ended September 30, 2008,
compared to 2007, due partly to the change in sales volume. The average net
margin earned on projects during 2008 was 25.9% for the third quarter and 15.7%
for the nine-month period compared to 28.3% for the third quarter and 26.5% for
the nine-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 $933,000, or 27.5%, and $2,343,000, or 22.8%, for the
quarter and nine months ended September 30, 2008, respectively, compared to
2007. Depreciation on assets acquired in the CJ transaction totaled
approximately $851,000 and $2,461,000 for the quarter and nine months ended
September 30, 2008, respectively.





General and administrative (G&A)
expenses increased $3,086,000, or 24.0%, and $13,092,000, or 34.8%, for
the quarter and nine months ended September 30, 2008, respectively, compared to
2007. 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 11.9% and 13.3% of revenue for the quarter
and nine months ended September 30, 2008, respectively, compared to 12.7% and
13.7% of revenue for the quarter and nine months ended September 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 $1,195,000 for the nine months
ended September 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





16
 Table of Contents





Interest expense increased
$101,000, or 8.6%, and $34,000, or 0.9%, in the quarter and nine months ended
September 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 $16.4 million in the nine months ended September 30, 2008,
compared to $10.0 million in the nine months ended September 30, 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 2008 compared to 2007. During the nine months ended
September 30, 2008, we also paid approximately $1,949,000 in balloon payments on
promissory notes secured by aircraft.





Loss on early extinguishment of
debt for the quarter and nine months ended September 30, 2007, totaled
$757,000 and related to the refinancing of $21.8 million in term loans and our
line of credit in September 2007. We wrote off approximately $645,000 in debt
origination costs related to the term loans and line of credit and paid a
prepayment penalty and other related costs of $112,000 to the
lenders.





Income tax expense was
$5,835,000 and $10,939,000 in the quarter and nine months
ended September 30, 2008, respectively, compared to $7,838,000 and $16,039,000
in the quarter and nine months ended September 30, 2007, respectively. The
effective tax rate was approximately 41% for all periods.






LIQUIDITY AND CAPITAL RESOURCES





Our
working capital position as of September 30, 2008, was $105,933,000, compared to
$112,758,000 at December 31, 2007. We had cash and cash equivalents of
$9,171,000 as of September 30, 2008, compared to $5,134,000 at December 31,
2007. Cash generated
by operations was $44,318,000 in 2008, compared to $31,838,000 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 nine-month period or offset by estimated
income taxes payable for 2008 operations.





Cash used
by investing activities totaled $26,860,000 in 2008 compared to $11,878,000 in
2007. Equipment acquisitions in 2008 included the buyout of fifteen leased
aircraft for approximately $19.1 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 nine other aircraft during the period for total proceeds of
$10.5 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 $1.2 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 and received an insurance settlement of approximately $3.0 million
for one of our helicopters totaled in an accident.





Financing
activities used $13,421,000 in 2008 compared to $13,702,000 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 2008 we also repurchased 100,000 shares of our
common stock for $2.9 million. In 2007 we used cash generated by operations to
pay down the balance outstanding against our line of credit and used $25 million
of term loan proceeds to repay $21.8 million in term loans with another lender.
Debt issuance costs of $618,000 were primarily associated with the new term
loans.





We
currently finance the majority of our aircraft fleet and are party to a $100
million senior credit facility. Recently several financial institutions have
experienced liquidity problems and/or have been acquired by other financial
institutions. While we have not yet been impacted by these events, in the future
financial institutions may become unable or unwilling to fund our aircraft
financing needs or to fund our borrowing requests under the senior credit
facility.








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.





17
 Table of Contents





Community-Based
Services




We opened
a new base in the southwest region during the first quarter of 2008 and one in
the Midwest during the fourth quarter and closed three bases in the southeast
region during the third quarter 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




Eight
customers have expanded to satellite locations during 2008. Eighteen hospital
contracts are due for renewal in 2008, five of which have been renewed for terms
ranging from one to five years. Three other contracts were allowed to expire
during the first or second quarters of 2008. Renewals on all other contracts are
still pending. We negotiated early termination of two of our hospital contracts,
one effective in the third quarter of 2008 and one expected to be effective in
the first quarter of 2009. In the fourth quarter of 2008, we reached an
agreement in principle to begin operations in Alaska, utilizing two helicopters,
in the first quarter of 2009; negotiations on the final version of a three-year
contract with the hospital customer are still in process.





Products
Division





As of
September 30, 2008, forty-eight HH60L units, sixty 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 as of
September 30, 2008, are expected to be completed by the third quarter of 2010,
and remaining revenue is estimated at $16.4 million. In the fourth quarter of
2008, we were also awarded a contract for approximately $15 million to produce
at least 300 MEV units through the third quarter of 2010.





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





All
Segments





There can
be no assurance that we will successfully integrate CJ operations into the CBS
and HBS divisions, continue to maintain flight volume or current rate of
reimbursement 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 $31.0 million in borrowing capacity available under our revolving
credit facility and cash balances of $9.2 million as of September 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.





18
 Table of Contents





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 nine
months ended September 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 $5,045,000 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.





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.





19
 Table of Contents





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 $17,531,000 outstanding against the line of credit and
$46,430,000 in notes payable. Based on the amounts outstanding at September 30,
2008, the annual impact of a change of 100 basis points in interest rates would
be approximately $640,000. Interest rates on these instruments approximate
current market rates as of September 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 nine months ended September 30,
2008, the impact on operating costs of an increase of 10% in the cost of
aircraft fuel per hour flown would be approximately $1,358,000 for the
nine-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 nine-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.








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 September 30, 2008, pursuant to Rule 13a-15(b) under the Exchange Act. Based
on that evaluation, the Certifying Officers have concluded that, as of September
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.








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, except as noted
below:





Current
banking environment – We currently finance the majority of our aircraft fleet
and are party to a $100 million senior credit facility. Recently several
financial institutions have experienced liquidity problems and/or have been
acquired by other financial institutions. While we have not yet been impacted by
these events, in the future financial institutions may become unable or
unwilling to fund our aircraft financing needs or to fund our borrowing requests
under the senior credit facility.





20
 Table of Contents





Item 2.
            Changes
      in Securities





Not
Applicable





Item 3.
            Defaults
      upon Senior Securities





Not
Applicable





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





The 2008
Annual Meeting of Stockholders was held on July 1, 2008. At the meeting,
Messrs. Samuel H. Gray, Morad Tahbaz, and Aaron D. Todd were elected to
Class II directorships. Voting results were as follows:





Total
      Vote For
                    Each Director
                  
                  
                  Total
      Vote
                    Withheld
      From
                    Each DirectorSamuel
      H. Gray
                  
                  
                  9,416,387
                  
                  
                  
                  1,784,606Morad
      Tahbaz
                  
                  
                  10,515,254
                  
                  
                  
                  685,827Aaron
      D. Todd
                  
                  
                  10,512,123
                  
                  
                  
                  688,728





Following
the meeting, George W. Belsey; Ralph J. Bernstein; C. David Kikumoto; MG Carl H.
McNair, Jr. USA (Ret.); Lowell D. Miller, Ph. D.; and David A. Roehr continued
to serve as directors.





Stockholders
did not approve an amendment to the Company’s Certificate of Incorporation, as
amended, to increase the aggregate number of authorized shares from 21,000,000
to 55,000,000, consisting of an increase in the number of authorized shares of
common stock from 16,000,000 to 50,000,000 shares. Voting results were as
follows:





For
                  
                  Against
                  
                  Abstain/Broker Non-Vote3,274,921
                  
                  7,909,486
                  
                  19,219





Item 5.
            Other
      Information





Not
Applicable





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





21
 Table of Contents





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 CORPORATIONDate:  November
      7, 2008
                By
                \s\   Aaron D.
      ToddAaron
      D. ToddChief
      Executive Officer(Principal
      Executive Officer)Date:  November
      7, 2008
                By
                \s\   Trent J.
      CarmanTrent
      J. CarmanChief
      Financial Officer(Principal
      Financial Officer)Date:  November
      7, 2008
                By
                \s\   Sharon J.
      KeckSharon
      J. KeckChief
      Accounting Officer(Principal
      Accounting Officer)







22