10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

or

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

For the transition period from                      to                     

Commission file number 0-9827

PHI, INC.

(Exact name of registrant as specified in its charter)

2001 SE Evangeline Thruway
Lafayette, Louisiana 70508
(337) 235-2452
(Address, including zip code and telephone number of principal executive office)

Louisiana
(State or other jurisdiction of incorporation or organization) 72-0395707
(I.R.S. Employer Identification No.)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Voting Common Stock	The NASDAQ Global Market
Non-Voting Common Stock	The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o No: þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No: þ

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: þ No: o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. þ

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

     Large accelerated filer: o               Accelerated filer: þ                        Non-accelerated filer: o                   Smaller reporting company: o

                                        (Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes: o No: þ

     The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2007 was $458,988,668 based upon the last sales prices of the voting and non-voting common stock on June 30, 2007, as reported on the NASDAQ Global Market.

     The number of shares outstanding of each of the registrant’s classes of common stock, as of February 29, 2008 was:

Voting Common Stock	2,852,616	shares.
Non-Voting Common Stock	12,438,992	shares.

Documents Incorporated by Reference

     Portions of the registrant’s definitive Information Statement for the 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

PHI, INC.

INDEX – FORM 10-K

PART I
Item 1. Business	1
Item 1A. Risk Factors	4
Item 1B. Unresolved Staff Comments	11
Item 2. Properties	11
Item 3. Legal Proceedings	13
Item 4. Submission of Matters to a Vote of Security Holders	13
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholders Matters and Issuer Purchases of Equity Securities	13
Item 6. Selected Financial Data	15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	25
Item 8. Financial Statements and Supplementary Data	26
PHI, Inc. and Consolidated Subsidiaries:
Report of Independent Registered Public Accounting Firm	26
Consolidated Balance Sheets - Years ended December 31, 2007 and 2006	27
Consolidated Statements of Operations - Years ended December 31, 2007, 2006 and 2005	28
Consolidated Statements of Shareholders’ Equity - Years ended December 31, 2007, 2006, and 2005	29
Consolidated Statements of Cash Flows - Years ended December 31, 2007, 2006, and 2005	30
Notes to Consolidated Financial Statements	31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	54
Item 9A. Controls and Procedures	54
Report of Independent Registered Public Accounting Firm
Item 9B. Other Information	56
PART III
Item 10. Directors, Executive Officers and Corporate Governance	56
Item 11. Executive Compensation	56
Item 12. Security Ownership of Certain Beneficial Owners and Management	56
Item 13. Certain Relationships, Related Transactions and Director Independence	56
Item 14. Principal Accounting Fees and Services	56
PART IV
Item 15. Exhibits, Financial Statement Schedules	57
Signatures	60
Amended and Restated 401(k) Retirement Plan
Subsidiaries
Consent of Deloitte & Touche LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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PART I

Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-K and other periodic reports filed by PHI, Inc. (the “Company” or “PHI”) under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words “anticipates”, “expects”, “believes”, “goals”, “intends”, “plans”, “projects” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of assumptions about future events and are subject to significant risks, uncertainties, and other factors that may cause the Company’s actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct or even approximately correct. Factors that could cause the Company’s results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following: unexpected variances in flight hours, the effect on demand for our services caused by volatility of oil and gas prices and the level of exploration and production activity in the Gulf of Mexico, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the “Risk Factors” section in Item 1A below. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors section below. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

ITEM 1. BUSINESS

General

Since our incorporation in 1949, our primary business has been the safe and reliable transportation of personnel and, to a lesser extent, parts and equipment, to, from, and among offshore platforms for customers engaged in the oil and gas exploration, development, and production industry, principally in the Gulf of Mexico. We are a leading provider of helicopter transportation services in the Gulf of Mexico. We also provide helicopter services to the oil and gas industry internationally, and to non-oil and gas customers such as health care providers and U.S. governmental agencies such as the National Science Foundation. We also provide helicopter maintenance and repair services to certain customers. At December 31, 2007, we owned or operated approximately 237 aircraft domestically and internationally.

Description of Operations

We operate in three business segments: Oil and Gas, Air Medical, and Technical Services. For financial information regarding our operating segments and the geographic areas in which they operate, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

During the quarter ended March 31, 2007, we combined our oil and gas customers that were previously included in our International segment into our Domestic Oil and Gas segment, and eliminated the term “Domestic” from that segment. Additionally, the contract work previously included in the International segment for the National Science Foundation is now included in our Technical Services segment. We therefore now have three reportable segments: Oil and Gas, Air Medical, and Technical Services. All prior periods have been recast to conform to the 2007 presentation.

A segment’s operating income is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that is charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses is based primarily on total segment costs as a percentage of total operating costs.

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Air Medical operations are headquartered in Phoenix, AZ, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.

Oil and Gas. Our Oil and Gas segment provides helicopter services primarily for the major oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico, Angola and the Democratic Republic of Congo. We currently operate 163 aircraft in this segment.

Oil and gas exploration and production companies and other offshore oil service companies use our services primarily for routine transportation of personnel and equipment, to transport personnel during medical and safety emergencies, and to evacuate personnel during the threat of hurricanes and other adverse weather conditions. Most of our customers have entered into contracts for transportation services for a term of one year or longer, although some hire us on an “ad hoc” or “spot” basis.

Most of our Oil and Gas aircraft are available for hire by any customer, but some are dedicated to individual customers. Our helicopters have flight ranges up to 495 miles with a 30-minute fuel reserve and thus are capable of servicing many of the deepwater oil and gas operations from 50 to 200 miles offshore. (See Item 2 – Properties, for specific information by aircraft model.)

Operating revenue from the Oil and Gas segment is derived mainly from long-term contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Operating costs for the Oil and Gas operations are primarily aircraft operation costs, including costs for pilots and maintenance personnel.

Operating revenues from the Oil and Gas segment accounted for 64%, 66%, and 67% of consolidated operating revenues during the years ended December 31, 2007, 2006, and 2005, respectively.

Air Medical. We provide air medical transportation services for hospitals and emergency service agencies where we operate as an independent provider of medical services in 15 states using approximately 70 aircraft at 62 separate locations. The Air Medical segment’s operating revenues accounted for 34%, 32%, and 31% of consolidated operating revenues for the years ended December 31, 2007, 2006, and 2005, respectively.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with the third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute an 18 month historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $31.9 million, $29.9 million, and $24.2 million as of December 31, 2007, 2006 and 2005, respectively. The allowance for uncompensated care was $19.1 million, $20.1 million, and $11.5 million as of December 31, 2007, 2006, and 2005, respectively.

Provisions for contractual discounts and estimated uncompensated care are as follows:

	Revenue									Accounts Receivable
	Year Ended December 31,									Year Ended December 31,
	2007			2006			2005			2007			2006			2005
Gross billings		100	%		100	%		100	%		100	%		100	%		100	%
Provision for contractual discounts		46	%		43	%		42	%		33	%		32	%		34	%
Provision for uncompensated care		10	%		10	%		9	%		20	%		22	%		16	%

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Amounts attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air Medical revenues are as follows:

	Year Ended December 31,
	2007			2006			2005
Medicaid		10	%		12	%		14	%
Medicare		16	%		14	%		10	%
Insurance		66	%		62	%		60	%
Self Pay		8	%		12	%		16	%

We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generate approximately 8% of the segment’s revenues.

Technical Services. The Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We also operate four aircraft for the National Science Foundation in Antarctica under this segment.

Operating revenues from the Technical Services segment accounted for 2% of consolidated operating revenues for the years ended December 31, 2007, 2006, and 2005.

Seasonal Aspects

Seasonality affects our operations in three principal ways: weather conditions are generally poorer in December, January, and February; tropical storms and hurricanes are prevalent in the Gulf of Mexico in late summer and early fall; and reduced daylight hours restrict our operations in winter, which result in reduced flight hours. When a tropical storm or hurricane is about to enter or begins developing in the Gulf of Mexico, flight activity may temporarily increase because of evacuations of offshore workers, but during the storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. For a more detailed discussion of these events, see the “Adverse Weather Conditions” paragraph in the “Risk Factors” section of Item 1A. Our operating results vary from quarter to quarter, depending on seasonal factors and other factors outside of our control. As a result, full year results are not likely to be a direct multiple of any particular quarter or combination of quarters.

Inventories

We carry a significant inventory of aircraft parts to support the maintenance and repair of our helicopters. Many of these inventory items are parts that have been removed from aircraft, refurbished according to manufacturers and FAA specifications, and returned to inventory. The cost to refurbish these parts is expensed as incurred. We use systematic procedures to estimate the value of these used parts, which include consideration of their condition and continuing utility. The carrying values of inventory reported in our financial statements are affected by these estimates and may change from time to time if our estimated values change.

Customers

Our principal customers are major integrated energy companies and independent exploration and production companies. We also serve oil and gas service companies, hospitals and medical programs under the independent provider model, government agencies, and other aircraft owners and operators. Our largest customer is in our Oil and Gas segment and accounted for 15%, 17%, and 14% of operating revenues for the years ended December 31, 2007, 2006, and 2005, respectively. We have entered into contracts with most of our customers for terms of at least one year, although most contracts include provisions permitting earlier termination.

Competition

Our business is highly competitive in each of our markets, and many of our contracts are awarded after competitive bidding. Factors that impact competition include safety, reliability, price, availability of appropriate aircraft and quality of service. Some of our competitors recently have undertaken expansion and/or upgrades of their fleets.

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We are a leading operator of helicopters in the Gulf of Mexico. There are two major and several small competitors operating in the Gulf of Mexico market. Although most oil companies traditionally contract for most specialty services associated with offshore operations, including helicopter services, certain of our customers and potential customers in the oil industry operate their own helicopter fleets, or have the capability to do so if they so elect.

In the air medical market, we compete against national and regional firms, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.

Employees

As of December 31, 2007, we employed approximately 2,254 full-time employees and 45 part-time employees, including approximately 643 pilots and 1,656 aircraft maintenance and support personnel.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.

A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

The Company has continued to hire and train pilots to meet staffing needs for new and existing aircraft. As of February 14, 2008, the pilot work force was 646.

Environmental Matters

We are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage, recycling, and disposal of toxic and hazardous wastes. Operating and maintaining helicopters requires that we use, store, and dispose of materials that are subject to federal and state environmental regulation. We periodically conduct environmental site surveys at our facilities, and determine whether there is a need for environmental remediation based on these surveys.

Availability of SEC filings and other information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to any of these reports are available free of charge through our web site: www.phihelico.com. These reports are available as soon as reasonably practicable after we file them with the Securities and Exchange Commission (“SEC”). You may also read and copy any of the materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.

ITEM 1A. Risk Factors

All phases of our operations are subject to significant uncertainties, risks, and other influences. Important factors that could cause our actual results to differ materially from anticipated results or other expectations include the following:

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RISKS INHERENT IN OUR BUSINESS

Our operations are affected by adverse weather conditions and seasonal factors.

We are subject to three types of weather-related or seasonal factors:

Ø the tropical storm and hurricane season in the Gulf of Mexico;

Ø poor weather conditions that often prevail during winter and can develop in any season; and

Ø reduced daylight hours during the winter months.

Poor visibility, high winds and heavy precipitation can affect the operation of helicopters and significantly reduce our flight hours. A significant portion of our operating revenue is dependent on actual flight hours and a substantial portion of our direct costs is fixed. Thus, prolonged periods of adverse weather can materially and adversely affect our operating revenues and net earnings.

In the Gulf of Mexico, the months of December, January and February have more days of adverse weather conditions than the other months of the year. Also, June through November is tropical storm and hurricane season in the Gulf of Mexico, with August and September typically being the most active months. During tropical storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. In addition, as most of our facilities are located along the Gulf of Mexico coast, tropical storms and hurricanes may cause substantial damage to our property, including helicopters that we are unable to relocate.

Because the fall and winter months have fewer hours of daylight, our flight hours are generally lower at those times, which typically results in a reduction in operating revenues during those months. Currently, only 50 of the 163 helicopters used in our oil and gas operations are equipped to fly under instrument flight rules, or IFR, which enables these aircraft, when manned by IFR-rated pilots and co-pilots, to operate when poor visibility or darkness prevents flight by aircraft that can fly only under visual flight rules, or VFR. Not all of our pilots are IFR rated.

We may not be able to obtain acceptable customer contracts covering some of our new helicopters, and there will be a delay between the time that a helicopter is delivered to us and the time that it can begin generating revenues.

We are substantially expanding and upgrading our medium and heavy helicopter fleet. Many of our new oil and gas helicopters may not be covered by customer contracts when they are placed into service, and we cannot assure you as to when we will be able to utilize these new helicopters or on what terms. In addition, with respect to those helicopters that will be covered by customer contracts when they are placed into service, our contract terms generally are too short to recover our cost of purchasing the helicopter at current rates. Thus, we are subject to the risk that we will be unable to recoup our investment in the helicopters.

Once a new helicopter is delivered to us, we generally spend between two and five months installing mission-specific and/or customer-specific equipment before we place it into service. As a result, there can be a significant delay between the delivery date for a new helicopter and the time that it is able to generate revenues for us.

There is also a possibility that our customers may request new helicopters in lieu of our existing helicopters, which could adversely affect the utilization of our existing fleet.

Our contracts generally can be terminated or downsized by our customers without penalty.

Most of our fixed-term contracts contain provisions permitting early termination by the customer, sometimes with as little as 30 days’ notice for any reason and generally without penalty. In addition, many of our contracts permit our customers to decrease the number of aircraft under contract with a corresponding decrease in the fixed monthly payments without penalty. As a result, you should not place undue reliance on our customer contracts or the terms of those contracts.

Increased governmental regulations could increase our costs or reduce our ability to operate successfully.

Our operations are regulated by a number of federal and state agencies. All of our flight operations are regulated by the Federal Aviation Administration, or FAA. Aircraft accidents are subject to the jurisdiction of the National Transportation Safety Board. Standards relating to the workplace health and safety are monitored by the federal

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Occupational Safety and Health Administration, or OSHA. We are also subject to various federal and state environmental statutes.

The FAA has jurisdiction over many aspects of our business, including personnel, aircraft and ground facilities. We are required to have an Air Taxi Certificate, granted by the FAA, to transport personnel and property in our helicopters. This certificate contains operating specifications that allow us to conduct our present operations, but it is potentially subject to amendment, suspension or revocation in accordance with procedures set forth in the Federal Aviation Act. The FAA conducts regular inspections regarding the safety, training and general regulatory compliance of our U.S. aviation operations. Additionally, the FAA requires us to file reports confirming our continued compliance.

FAA regulations require that at least 75% of our voting securities be owned or controlled by citizens of the U.S. or one of its possessions, and that our president and at least two-thirds of our directors be U.S. citizens. Our Chief Executive Officer and all of our directors are U.S. citizens, and our organizational documents provide for the automatic reduction in voting power of each share of voting common stock owned or controlled by a non-U.S. citizen if necessary to comply with these regulations.

We are subject to significant regulatory oversight by OSHA and similar state agencies. We are also subject to the Communications Act of 1934 because of our ownership and operation of a radio communications flight-following network throughout the Gulf of Mexico.

Numerous other federal statutes and rules regulate our offshore operations and those of our customers, pursuant to which the federal government has the ability to suspend, curtail or modify certain or all offshore operations. A suspension or substantial curtailment of offshore oil and gas operations for any prolonged period would have an immediate and materially adverse effect on us. A substantial modification of current offshore operations could adversely affect the economics of such operations and result in reduced demand for our services.

The helicopter services business is highly competitive.

All segments of our business are highly competitive. Many of our contracts are awarded after competitive bidding, and the competition for those contracts generally is intense. The principal aspects of competition are safety, price, reliability, availability and service.

We have two major competitors and several small competitors operating in the Gulf of Mexico, and most of our customers and potential customers could operate their own helicopter fleets if they chose to do so. At least one of our primary competitors is in the process of significantly expanding its fleet.

Our Air Medical segment competes for business primarily under the independent provider model and, to a lesser extent, under the hospital-based model. Under the independent provider model, we have no contracts and no fixed revenue stream, but must compete for transport referrals on a daily basis with other independent operators in the area. Under the hospital-based model, we contract directly with the hospital to provide their transportation services, with the contracts typically awarded on a competitive bid basis. Under both models, we compete against national and regional companies, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.

The failure to maintain our safety record would seriously harm our ability to attract new customers and maintain our existing customers.

A favorable safety record is one of the primary factors a customer reviews in selecting an aviation provider. If we fail to maintain our safety and reliability record, our ability to attract new customers and maintain our current customers will be materially adversely affected.

Helicopter operations involve risks that may not be covered by our insurance or may increase the cost of our insurance.

The operation of helicopters inherently involves a high degree of risk. Hazards such as aircraft accidents, collisions, fire and adverse weather are hazards that must be managed by providers of helicopter services and may result in loss of life, serious injury to employees and third parties, and losses of equipment and revenues.

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We maintain hull and liability insurance on our aircraft, which insures us against physical loss of, or damage to, our aircraft and against certain legal liabilities to others. In addition, we carry war risk, expropriation, confiscation and nationalization insurance for our aircraft involved in international operations. In some instances, we are covered by indemnity agreements from our customers in lieu of, or in addition to, our insurance. Our aircraft are not insured for loss of use.

While we believe that our insurance and indemnification arrangements provide reasonable protection for most foreseeable losses, they do not cover all potential losses and are subject to deductibles, retentions, coverage limits and coverage exceptions such that severe casualty losses, or the expropriation or confiscation of significant assets could materially and adversely affect our financial condition or results of operations. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our financial condition, results of operations, and cash flows.

Our air medical operations expose us to numerous special risks, including collection risks, high start-up costs and potential medical malpractice claims.

We expanded our Air Medical operations significantly from 2004 to 2006. These operations are highly competitive and expose us to a number of risks that we do not encounter in our oil and gas operations. For instance, the fees for our air medical services generally are paid by individual patients, insurance companies, or government agencies such as Medicare and Medicaid. As a result, our profitability in this business depends not only on our ability to generate an acceptable volume of patient transports, but also on our ability to collect our transport fees. We are not permitted to refuse service to patients based on their inability to pay.

As a result of our recent expansion, even if we are able to generate an acceptable volume of patient transports, we cannot assure you that our new markets will be profitable for us. We generally incurred significant startup costs and lower utilization rates when we entered new air medical markets, which impacted our profitability. Finally, we employ paramedics, nurses, and other medical professionals for these operations, which can give rise to medical malpractice claims against us, which, if not fully covered by our medical malpractice insurance, could materially adversely affect our financial condition and results of operations.

Our international operations are subject to political, economic and regulatory uncertainty.

Our international operations, which represented approximately 5% of our total operating revenues for the year ended December 31, 2007, are subject to a number of risks inherent in operating in lesser developed countries, including:

Ø political, social and economic instability;

Ø terrorism, kidnapping and extortion;

Ø potential seizure or nationalization of assets;

Ø import-export quotas; and

Ø currency fluctuations or devaluation.

Additionally, our competitiveness in international markets may be adversely affected by government regulation, including regulations requiring:

Ø the awarding of contracts to local contractors;

Ø the employment of local citizens; and

Ø the establishment of foreign subsidiaries with significant ownership positions reserved by the foreign government for local ownership.

Our failure to attract and retain qualified personnel could adversely affect us.

Our ability to attract and retain qualified pilots, mechanics, nurses, paramedics and other highly trained personnel will be an important factor in determining our future success. Many of our customers require pilots of aircraft that service them to have inordinately high levels of flight experience. The market for these experienced and highly trained personnel is extremely competitive. Accordingly, we cannot assure you that we will be successful in our

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efforts to attract and retain such persons. Some of our pilots and mechanics, and those of our competitors, are members of the U.S. military reserves and could be called to active duty. If significant numbers of such persons are called to active duty, it would reduce the supply of such workers, possibly curtailing our operations and likely increasing our labor costs.

RISKS SPECIFIC TO OUR COMPANY

We are highly dependent on the offshore oil and gas industry.

Approximately 60% of our 2007 operating revenue was attributable to helicopter support for domestic offshore oil and gas exploration and production companies. Our business is highly dependent on the level of activity by oil and gas companies, particularly in the Gulf of Mexico. The level of activity by our customers operating in the Gulf of Mexico depends on factors that we cannot control, such as:

Ø the supply of, and demand for, oil and natural gas and market expectations regarding supply and demand;

Ø weather-related or other natural causes;

Ø actions of OPEC, and Middle Eastern and other oil producing countries, to control prices or change production levels;

Ø general economic conditions in the United States and worldwide;

Ø war, civil unrest or terrorist activities;

Ø governmental regulation; and

Ø the price and availability of alternative fuels.

Any substantial or extended decline in the prices of oil and natural gas could depress the level of helicopter activity in support of exploration and production activity, and thus have a material adverse effect on our business, results of operations and financial condition.

Additionally, the Gulf of Mexico is generally considered to be a mature area for oil and gas exploration, which may result in a continuing decrease in activity over time. This could materially adversely affect our business, results of operations and financial condition. In addition, the concentrated nature of our operations subjects us to the risk that a regional event could cause a significant interruption in our operations or otherwise have a material affect on our profitability.

Moreover, companies in the oil and gas exploration and production industry continually seek to implement cost-savings measures. As part of these measures, oil and gas companies have attempted to improve operating efficiencies with respect to helicopter support services. For example, certain oil and gas companies have pooled helicopter services among operators, reduced staffing levels by using technology to permit unmanned production installations and decreased the frequency of transportation of employees offshore by increasing the lengths of shifts offshore. The continued implementation of such measures could reduce demand for helicopter services and have a material adverse effect on our business, results of operations and our financial condition.

Our pilot workforce is represented by the Office and Professional Employees International Union, with which the Company is engaged in strike-related litigation.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.

A trial on strike-related matters is currently set to start on November 6, 2008. It is not possible to assess the outcome of that litigation.

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We depend on a small number of large oil and gas industry customers for a significant portion of our revenues, and our credit exposure within this industry is significant.

We derive a significant amount of our revenue from a small number of major and independent oil and gas companies. For the year ended December 31, 2007, 15% of our revenues were attributable to our largest customer. The loss of one of our significant customers, if not offset by revenues from new or other existing customers, would have a material adverse effect on our business and operations. In addition, this concentration of customers may impact our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions.

Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has voting control of the Company.

Al A. Gonsoulin, our Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of our total voting power. As a result, he exercises control over the election of all of our directors and the outcome of most matters requiring a stockholder vote. This ownership also may delay or prevent a change in our management or a change in control of us, even if such changes would benefit our other stockholders and were supported by a majority of our stockholders.

Our substantial indebtedness could adversely affect our financial condition and impair our ability to operate our business.

We are a highly leveraged company and, as a result, have significant debt service obligations. As of December 31, 2007, our total long-term indebtedness was $200.0 million, consisting of $200 million of our 7.125% Senior Notes due 2013. On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares, and then on May 1, 2006 we completed the sale of the over-allotment of shares of 578,680 non-voting common shares. These transactions resulted in an increase in shareholder equity of $160.7 million, net of expenses. We also issued $200 million of 7.125% Senior Notes due April 15, 2013. Proceeds of the Notes were used to retire our existing $200 million 9 3/8% Senior Notes due May 1, 2009. These transactions are discussed in more detail under “Management’s Discussion And Analysis of Financial Condition and Results of Operations – Overview” below. As a result of these transactions, our debt to equity ratio at December 31, 2007 was 0.47 to 1.00, as compared to 0.51 to 1.00 at December 31, 2006.

At December 31, 2007, we had no borrowings and $4.6 million in letters of credit outstanding under our revolving line of credit. As of December 31, 2007, availability for borrowings under our revolving credit facility was $30.4 million.

Our substantial indebtedness could have significant negative consequences to us that you should consider. For example, it could:

Ø require us to dedicate a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;

Ø increase our vulnerability to general adverse economic and industry conditions and limit our ability to withstand competitive pressures;

Ø limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;

Ø place us at a competitive disadvantage compared to our competitors that have less debt; and

Ø limit our ability to obtain additional financing for working capital, capital expenditures and other aspects of our business plan.

Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we are unable to control. When our 7.125% Senior Notes come due in 2013, we will likely need to enter into new financing arrangements at that time to repay those notes. We may be unable to obtain that financing on favorable terms, which could adversely

9

affect our business, financial condition and results of operations. For more information on our indebtedness, please see the financial statements included elsewhere herein.

The United States Department of Justice (“DOJ”) investigation could result in criminal proceedings and the imposition of fines and penalties.

On June 15, 2005, we received a subpoena from the DOJ relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We will respond to any DOJ request for further information, and will continue to cooperate with the investigation.

We cannot predict the ultimate outcome of the DOJ investigation. The outcome of the DOJ investigation and any related legal proceedings could include civil injunctive or criminal proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to other governmental agencies and/or the payment of damages in civil litigation, any of which could have a material adverse effect on our business, financial condition and results of operations. Additionally, the cost of defending such an action or actions against us could be significant.

Our stock has a low trading volume.

Our common stock is listed for trading on The NASDAQ Global Market under the symbol ‘‘PHIIK’’ for our non-voting common stock and ‘‘PHII’’ for our voting common stock. Both classes of common stock have low trading volume. As a result, a stockholder may not be able to sell shares of our common stock at the time, in the amounts, or at the price desired.

We do not pay dividends.

We have not paid any dividends on our common stock since 1999 and do not anticipate that we will pay dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is restricted by the indenture governing our 7.125% Senior Notes due 2013 and our bank credit facility. There are limitations and restrictions on the payment of dividends, more fully described in Form 10-K, Item 15 Exhibits and Financial Statement Schedules, Exhibit 4.7.

Provisions in our articles of incorporation and by-laws and Louisiana law make it more difficult to effect a change in control of us, which could discourage a takeover of our company and adversely affect the price of our common stock.

Although an attempted takeover of our company is unlikely by virtue of the ownership by our Chief Executive Officer of more than 50% of the total voting power of our capital stock, there are also provisions in our articles of incorporation and by-laws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you. For example, our articles of incorporation authorize our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for, or discourage, a third party to acquire us.

In addition, provisions of our by-laws, such as giving the board the exclusive right to fill all board vacancies, could make it more difficult for a third party to acquire control of us. In addition to the provisions contained in our articles of incorporation and by-laws, the Louisiana Business Corporation Law (‘‘LBCL”), includes certain provisions applicable to Louisiana corporations, such as us, which may be deemed to have an anti-takeover effect. Such provisions give stockholders the right to receive the fair value of their shares of stock following a control transaction from a controlling person or group and set forth requirements relating to certain business combinations. Our descriptions of these provisions are only abbreviated summaries of detailed and complex statutes. For a complete understanding of the statutes, you should read them in their entirety.

The LBCL’s control share acquisition statute provides that any person who acquires ‘‘control shares’’ will be able to vote such shares only if the right to vote is approved by the affirmative vote of at least a majority of both (i) all the votes entitled to be cast by stockholders and (ii) all the votes entitled to be cast by stockholders excluding ‘‘interested shares.’’ The control share acquisition statute permits the articles of incorporation or by-laws of a company to exclude from the statute’s application acquisitions occurring after the adoption of the exclusion. Our by-laws do contain such an exclusion; however, our board of directors or stockholders, by an amendment to our by-laws, could reverse this exclusion.

10

Future sales of our shares could depress the market price of our non-voting common stock.

The market price of our non-voting common stock could decline as a result of issuances and sales by us of additional shares of non-voting or voting common stock pursuant to our existing shelf registration statement or otherwise. The market price of our non-voting common stock could also decline as the result of the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Aircraft

Information regarding our owned and leased aircraft fleet and twelve customer-owned aircraft as of December 31, 2007 is set forth in the following table:

							Cruise		Appr.
		Number					Speed		Range
Manufacturer	Type	in Fleet		Engine	Passengers		(mph)		(miles)(2)
Light Aircraft
Bell	206 / 407		95	Turbine		4 – 6		130 – 150		300 – 420
Eurocopter	BK-117 / BO-105		11	Twin Turbine		4 – 6		135		255 – 270
Eurocopter	EC-135 (1)		30	Twin Turbine		7		143		382
Aerospatiale	AS350 B2 / B3		24	Turbine		5		140		337 – 385
Medium Aircraft
Bell	212 (1) / 222 (1)
	230 (1) / 412 (1) / 430 (1)		17	Twin Turbine		8 – 13		115 – 160		300 – 370
Sikorsky	S-76 (1) A++, C+, C++		41	Twin Turbine		12		150		400
Transport Aircraft
Sikorsky	S-92A(1)		10	Twin Turbine		19		160		495
	Total Helicopters		228
Fixed Wing
Rockwell(3)	Aero Commander		2	Turboprop		6		300-340		1,200-1,600
Lear Jet(4)	31A(1)		1	Turbojet		8		527		1,437
Cessna(4)	Conquest 441 (1)		3	Turboprop		6		330		1,200
Beech(4)	King Air(1)		3	Turboprop		8		300		1,380
	Total Fixed Wing		9
	Total Aircraft		237

(1)	Equipped to fly under instrument flight rules (“IFR”). All other types listed can only fly under visual flight rules (“VFR”). See Item 1A. “Business – Risk Factors, Risks Inherent In Our Business – Our operations are affected by adverse weather conditions and seasonal factors.”
(2)	Based on maintaining a 30-minute fuel reserve.
(3)	Aircraft used for corporate purposes.
(4)	Aircraft used in the Air Medical segment.

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Of the 237 aircraft listed, we own 205 and lease 20. Additionally, we operate 12 aircraft owned by customers also included in the table above.

We sell aircraft whenever they (i) become obsolete or (ii) do not fit into future fleet plans.

Facilities

Our principal facilities are located on property leased from the Lafayette Airport Commission at Lafayette Regional Airport in Lafayette, Louisiana. The lease covers approximately 28 acres and two buildings, with an aggregate of approximately 256,000 square feet, housing our main operational, executive, and administrative offices and the main repair and maintenance facility. The lease for this facility commenced in 2001, expires in 2021 and contains three five-year renewal options following the expiration date.

We own our Boothville, Louisiana operating facility. The property has a 23,000 square foot building, a 7,000 square foot hangar, and landing pads for 35 helicopters. This facility was extensively damaged by Hurricane Katrina, but was repaired and returned to service in 2006.

We also lease property for an Executive and Marketing office in Houston, Texas and 12 additional bases to service the oil and gas industry throughout the Gulf of Mexico. Those bases that represent a significant investment in leasehold improvements and are particularly important to our operations are:

Facility	Lease Expiration	Area	Facilities	Comments
Morgan City (Louisiana)	June 30, 2008	53 acres	Operational and maintenance facilities, landing pads for 46 helicopters	Options to extend to June 30, 2018
Intracoastal City (Louisiana)	December 31, 2008	18 acres	Operational and maintenance facilities, landing pads for 45 helicopters	Options to extend to December 31, 2010
Houma-Terrebonne Airport (Louisiana)	July 31, 2017	91 acres	Operational and maintenance facilities, landing pads for 30 helicopters	Facility under four separate leases, of which two contain options to extend thru 2027
Galveston (Texas)	May 31, 2021	4 acres	Operational and maintenance facilities, landing pads for 30 helicopters	Lease period to May 31, 2021 with certain cancellation provisions
Fourchon (Louisiana)	February 28, 2013	8 acres	Operational and maintenance facilities, landing pads for 10 helicopters	Facility under three separate leases, of which two contain options to extend thru 2026 and 2028.

Our other operations-related facilities in the United States are located at New Orleans and Lake Charles, Louisiana; at Port O’Connor and Sabine Pass, Texas; and at Theodore, Alabama.

We also operate from offshore platforms that are provided without charge by the owners of the platforms, although in certain instances we are required to indemnify the owners against loss in connection with our use of their facilities.

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We also lease office and hangar space for our Air Medical operations in Phoenix, Arizona. The two buildings are held under separate leases and collectively provide 5,000 square feet of hangar space and 26,000 square feet of office space. The leases expire in 2009, subject to options to extend for up to ten additional years. Other Air Medical bases are located in California, Indiana, Kentucky, Maryland, New Jersey, New Mexico, Texas and Virginia. Other bases for our International and other Air Medical operations are generally furnished by customers.

ITEM 3. LEGAL PROCEEDINGS

We have been named as a defendant in various legal actions that have arisen in the ordinary course of our business and have not been finally adjudicated. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

As previously reported, on June 15, 2005, we received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We have not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to predict the outcome of this investigation, although based on the information available to us to date, management does not expect the outcome of the investigation to have a material adverse effect on our financial condition, results of operations, or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our voting and non-voting common stock trades on The NASDAQ Global Market, under the symbols PHII and PHIIK, respectively. The following table sets forth the range of high and low sales prices per share, as reported by NASDAQ, for our voting and non-voting common stock for the fiscal quarters indicated.

	Voting				Non-Voting
Period	High		Low		High		Low
January 1, 2007 to March 31, 2007	$	34.10	$	23.45	$	33.30	$	25.03
April 1, 2007 to June 30, 2007		32.16		26.04		30.72		25.02
July 1, 2007 to September 30, 2007		34.00		19.94		34.69		27.02
October 1, 2007 to December 31, 2007		34.49		28.85		35.38		28.39
January 1, 2006 to March 31, 2006	$	41.00	$	29.00	$	39.48	$	30.00
April 1, 2006 to June 30, 2006		38.00		29.99		38.54		29.00
July 1, 2006 to September 30, 2006		34.24		29.01		34.39		26.69
October 1, 2006 to December 31, 2006		34.10		27.29		33.06		27.56

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We have not paid dividends on either class of our common stock since 1999 and do not expect to pay dividends in the foreseeable future.

In addition, the indenture governing our 7.125% Series B Senior Notes due 2013 and our revolving credit facility with a commercial bank restrict the payment of dividends. See Note 4 to the Consolidated Financial Statements.

Stock Performance Graph

The information included under the caption “Stock Performance Graph” in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specially incorporate it by reference into such a filing.

The following performance graph compares PHI’s cumulative total stockholder return on its voting common stock for the last five years with the cumulative total return on the Russell 2000 Index, the Oil Service Index, and a peer group, assuming the investment of $100 on January 1, 2003, at closing prices on December 31, 2002, and reinvestment of dividends. The Russell 2000 Index consists of a broad range of publicly-traded companies with small market capitalizations of $0.5 billion to $1.07 billion, and is published daily in the Wall Street Journal. The Oil Service Sector Index is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oil field equipment, support services, and geophysical/reservoir services. The peer group companies are Bristow Group, Inc.; Tidewater, Inc.; Gulfmark Offshore, Inc.; CHC Helicopter Corp.; Seacor Holdings, Inc.; and Air Methods Corp.

Index	2003		2004		2005		2006		2007
PHI		122.50		128.90		155.00		165.00		155.10
Peer Group		106.41		143.28		155.95		198.35		239.61
OSX		108.36		142.95		210.08		230.57		347.88
Russell 2000		115.60		135.25		139.75		163.50		159.01

As of February 29, 2008, there were approximately 936 holders of record of our voting common stock and 66 holders of record of our non-voting common stock.

Information regarding our stock based compensation plan is included in Note 6 to the Consolidated Financial Statements.

14

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for each of the past five fiscal periods should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

	Year Ended
	December 31,
	2007			2006			2005			2004			2003
	(Thousands)
Income Statement Data
Operating revenues	$	446,406		$	413,118		$	363,610		$	291,308		$	269,392
Net earnings (loss)		28,218			(667	)		14,154			3,972			1,139
Net earnings (loss) per share
Basic		1.85			(0.05	)		1.76			0.74			0.21
Diluted		1.85			(0.05	)		1.76			0.72			0.21
Weighted average shares outstanding
Basic		15,277			13,911			8,040			5,383			5,383
Diluted		15,286			13,911			8,063			5,486			5,486
Cash Flow Data
Net cash provided by operating activities	$	25,226		$	30,324		$	28,020		$	10,905		$	29,415
Net cash used in investing activities		(19,464	)		(178,928	)		(137,464	)		(18,594	)		(30,943	)
Net cash (used in) provided by financing activities		(5,157	)		146,388			108,947			8,275			2,026
Balance Sheet Data (1)
Current assets	$	230,029		$	307,689		$	224,265		$	128,405		$	110,135
Working capital		176,633			254,099			162,527			88,716			70,300
Property and equipment, net		484,119			369,465			311,678			253,241			258,526
Total assets		741,296			700,970			549,209			394,173			377,454
Total debt		200,000			205,500			204,300			210,275			202,000
Shareholders’ equity		428,669			400,125			239,051			109,975			105,993

(1) As of the end of the period.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this report.

Overview

Operating revenues for 2007 were $446.4 million compared to $413.1 million for 2006, an increase of $33.3 million. Oil and Gas operating revenues increased $15.4 million for 2007 due to an increase in medium and heavy aircraft flight hours and contractual rate increases. Operating revenues in the Air Medical segment increased $16.2 million due to rate increases and increased patient transports. Technical Services operating revenues increased $1.7 million due to increased activity in the segment.

Flight hours for 2007 were 140,369 compared to 150,980 for 2006. The decrease was due to a reduction in flight hours in our foreign operations, and continuing effects of the strike on our domestic operations related to pilot staffing levels. Although we have increased our pilot workforce since the termination of the pilots’ strike, we still have requirements for additional pilots, particularly in the Oil and Gas segment.

Oil and Gas segment’s operating income was $34.5 million for the year ended December 31, 2007, compared to $40.8 million for the year ended December 31, 2006. The decrease of $6.3 million was primarily due to an increase

15

in operating expenses of $21.3 million related to increased employee, aircraft leasing and aircraft warranty costs. Our Air Medical segment’s operating income was $4.0 million for the year ended December 31, 2007, compared to an operating loss of $4.4 million for the year ended December 31, 2006 primarily as a result of recovery from the effects of the pilots’ strike, along with rate increases initiated in 2007 and increased patient transports related to the expansion of new locations in the segment during the past three years. Technical Services operating income increased $2.1 million.

Net earnings for 2007 were $28.2 million, or $1.85 per diluted share, compared to a loss of $0.7 million for 2006, or $0.05 per diluted share. Pre-tax earnings were $45.7 million for 2007 compared to a loss of $1.1 million in 2006. Pre-tax gain on disposition of assets, net was $35.0 million in 2007 compared to $1.9 million in 2006. Earnings in 2006 were impacted by a pre-tax loss on debt restructuring of $12.8 million.

Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).

In 2007, we sold or disposed of 28 aircraft, primarily consisting of older aircraft that were not in our long term growth plan. We have also taken delivery of 29 aircraft, consisting of two heavy, 10 medium, 16 light, and one fixed wing aircraft.

At December 31, 2007, we had an order for six additional transport category aircraft at an approximate cost of $127.4 million with delivery dates throughout 2008 and 2009. We also had orders for 30 medium and light aircraft for service primarily in the Oil and Gas segment, although certain of these may be assigned to the Air Medical segment as growth opportunities are identified. The total cost of these aircraft is $154.0 million and delivery dates are scheduled throughout 2008 and 2009. We intend to fund these aircraft from existing cash, short-term investments, and operating leases, as required.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

As previously reported, on June 15, 2005, we received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. We are cooperating fully with the investigation and believe we have provided all documents and other information required by the subpoena. We have not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to predict the outcome of this investigation, although based on the information available to us to date, management does not expect the outcome of the investigation to have a material adverse effect on our financial condition, results of operations, or cash flows.

16

Results of Operations

The following table presents segment operating revenues, expense and operating profit before tax, along with certain non-financial operational statistics, for the years ended December 31, 2007, 2006 and 2005:

	Year Ended
	December 31,
	2007			2006			2005
	(Thousands of dollars)
Segment operating revenues
Oil and Gas	$	286,118		$	270,707		$	242,464
Air Medical		149,590			133,397			112,123
Technical Services		10,698			9,014			9,023
Total operating revenues		446,406			413,118			363,610
Segment direct expense
Oil and Gas		250,110			228,797			188,872
Air Medical		137,703			130,412			104,465
Technical Services		6,608			7,063			5,926
Total direct expense		394,421			366,272			299,263
Segment selling, general and administrative expenses
Oil and Gas		1,531			1,150			1,181
Air Medical		7,883			7,384			6,503
Technical Services		59			38			43
Total selling, general and administrative expenses		9,473			8,572			7,727
Total direct and selling, general and administrative expenses		403,894			374,844			306,990
Net segment profit (loss)
Oil and Gas		34,477			40,760			52,411
Air Medical		4,004			(4,399	)		1,155
Technical Services		4,031			1,913			3,054
Total		42,512			38,274			56,620
Other, net (1)		40,051			9,946			3,230
Unallocated selling, general and administrative expenses		(20,753	)		(19,267	)		(17,169	)
Interest expense		(16,121	)		(17,243	)		(20,448	)
Loss on debt restructuring		—			(12,790	)		—
Earnings (loss) before income taxes	$	45,689		$	(1,080	)	$	22,233
Flight hours
Oil and Gas		107,812			119,503			126,591
Air Medical		31,341			29,980			26,619
Technical Services		1,216			1,497			1,433
Total		140,369			150,980			154,643
Air Medical Transports		21,710			20,808			17,200
Aircraft operated at period end
Oil and Gas		163			164			167
Air Medical		70			68			64
Technical Services		4			4			4
Total (2)		237			236			235

(1)	Including gains on disposition of property and equipment, and other income.
(2)	Includes 12 aircraft as of December 31, 2007, 2006 and 2005 that are customer owned or leased by customers but operated by us.

17

Year Ended December 31, 2007 compared with Year Ended December 31, 2006

Combined Operations

Operating Revenues – Operating revenues for 2007 were $446.4 million compared to $413.1 million for 2006, an increase of $33.3 million, or 8%. Operating revenues increased in the Oil and Gas segment $15.4 million primarily due to an increase in medium and heavy aircraft flight hours and contractual rate increases in our domestic operations. Operating revenues in the Air Medical segment also increased $16.2 million in 2007 due to rate increases and increased patient transports. Revenues in the Technical Services segment increased $1.7 million due to an increase in activity. These items are discussed in more detail in the Segment Discussion below.

Other Income and Losses – Gain on equipment dispositions were $35.0 million for 2007 compared to $1.9 million for 2006. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet our strategic needs. We expect a substantial reduction in this amount prospectively. Other income, which primarily represents interest income on unspent proceeds from our April 2006 stock offering, was $5.1 million for 2007, compared to $8.0 million for 2006. This decrease resulted from a decrease in short-term investments as a substantial portion of these proceeds have now been spent acquiring new aircraft.

Direct Expenses – Direct expense was $394.4 million for 2007 compared to $366.3 million for 2006, an increase of $28.1 million, or 8%. Direct expense in the Oil and Gas segment increased $21.3 million, primarily due to increased employee costs ($7.9 million), aircraft lease expense ($6.2 million), and aircraft warranty costs ($7.2 million). Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million), aircraft warranty costs ($1.4 million), and outside services expenses ($2.2 million). Technical Services direct expense decreased $0.5 million. These items are discussed in more detail in the Segment Discussion below.

Selling, General and Administrative Expenses – Selling, general and administrative expenses were $30.2 million for 2007 compared to $27.8 million for 2006, an increase of $2.4 million, or 9%. This increase resulted from increased employee costs ($1.0 million), franchise taxes ($0.4 million), outside services ($0.2 million) primarily related to the Air Medical segment, legal fees ($0.3 million), and other items, net ($0.5 million).

Interest Expense – Interest expense was $16.1 million for 2007, compared to $17.2 million for 2006 due to a decrease in borrowings under our line of credit.

Income Taxes – Income tax expense for 2007 was $17.5 million, compared to income tax benefit of $0.4 million for 2006. The effective tax rate was 38% for 2007 and 2006.

Earnings – Our net earnings for 2007 was $28.2 million, compared to a net loss of $0.7 million for 2006. Earnings before tax for 2007 were $45.7 million compared to losses before tax of $1.1 million in 2006. Earnings per diluted share were $1.85 for 2007 as compared to losses per diluted share of $0.05 for 2006. Included in earnings before tax for 2007 are gains on disposition of assets of $35.0 million, compared to $1.9 million for 2006. The loss for 2006 included a loss on debt restructuring charge of $12.8 million related to the early call premium and associated costs for redemption of our 9 3/8% Senior Notes.

Segment Discussion

Oil and Gas – Oil and Gas segment revenues for 2007 were $286.1 million compared to $270.7 million for 2006, an increase of $15.4 million or 6%. The increase was due to an increase in medium and heavy aircraft flight hours and contractual rate increases. These increases were partially offset by a decrease in light aircraft flight hours due to competitive pricing pressures. Segment revenues were also adversely affected by less than optimal pilot staffing levels due to the residual effects of the strike and competition for pilots from the military and other companies. Segment flight hours were 107,812 for 2007 compared to 119,503 for 2006, a decrease of 11,691 hours. The number of aircraft in the segment at December 31, 2007 was 163 compared to 164 aircraft at December 31, 2006. In 2007, we sold or disposed of 22 aircraft in the Oil and Gas segment, consisting of nine light, nine medium and four heavy aircraft. We also transferred three light aircraft to the Air Medical segment. We have added 24 new aircraft to the Oil and Gas segment during 2007, consisting of 12 light, 10 medium, and two heavy aircraft. We have a total of 32 aircraft on order for delivery in 2008 and 2009 for the Oil and Gas segment, although certain of the light

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aircraft on order may be assigned to the Air Medical segment as growth opportunities materialize. For further information on our aircraft, see Item 2 – Properties contained in this Form 10-K

Direct expense in the Oil and Gas segment increased by $21.3 million due to increased employee costs ($7.9 million) due primarily to compensation increases including pilot overtime costs and other contract labor costs related to the strike, and incentive and safety compensation accruals. We also experienced increased aircraft lease expense ($6.2 million) and aircraft warranty costs ($7.2 million) due to additional aircraft added to the fleet. All new aircraft come with a manufacturer’s warranty that covers defective parts. The increase in our warranty cost is related to an additional warranty that we purchase from the manufacturer on certain aircraft to cover replacement or refurbishment of aircraft parts in accordance with manufacturer specifications. We pay a monthly fee to the manufacturer based on flight hours for the aircraft that are covered under this warranty. In return, the manufacturer provides replacement parts required for maintaining the aircraft. Depreciation expense decreased $0.2 million due to the change in residual value of certain aircraft effective July 1, 2007, as discussed in the Overview.

Selling, general and administrative expenses were $1.5 million for the year ended December 31, 2007, compared to $1.2 million for the prior year.

Our Oil and Gas segment’s operating income was $34.5 million for the year ended December 31, 2007, compared to $40.8 million for the year ended December 31, 2006. The decrease of $6.3 million was due to the increase in operating expenses of $21.3 million, offset by the increase in operating revenues of $15.4 million, for the reasons described above. Operating margins were 12% for the year ended December 31, 2007, compared to 15% for the year ended December 31, 2006, primarily due to pilot staffing levels resulting in reduced flight hours and lower revenues and increases in certain direct expenses, such as pilot overtime costs and other contract labor costs.

Air Medical – Air Medical segment revenues were $149.6 million for 2007 compared to $133.4 million for 2006, an increase of $16.2 million. The increase was primarily related to rate increases and an increase in patient transports, which totaled 21,710 for 2007 compared to 20,808 transports for 2006. Flight hours were 31,341 for the year ended December 31, 2007, compared to 29,980 for the year ended December 31, 2006. The number of aircraft in the segment was 70 at December 31, 2007, compared to 68 at December 31, 2006. In 2007, we transferred three light aircraft to the Air Medical segment from the Oil and Gas segment, and added five new aircraft, consisting of four light and one fixed wing aircraft. We sold four medium and two light aircraft. At December 31, 2007, we had a total of four aircraft on order for delivery in 2008 for the Air Medical segment.

Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million) due primarily to compensation increases including incentive and safety compensation accruals, aircraft warranty costs increases ($1.4 million) due to additional aircraft added to manufacturers’ warranty programs, and increased outside services expenses ($2.2 million) related to medical director fees and collection expenses. In addition to expected flight operation costs, the Air Medical segment incurs additional costs for necessary medical personnel. Other items decreased, net ($0.7 million).

Selling, general and administrative expenses was $7.9 million for the year ended December 31, 2007, compared to $7.4 million for the year ended December 31, 2006. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in higher selling, general and administrative expenses as compared to our other reportable segments.

Our Air Medical segment’s operating income was $4.0 million for the year ended December 31, 2007, compared to an operating loss of $4.4 million for the year ended December 31, 2006. Operating margins increased to 3% in the year ended December 31, 2007, compared to a loss in the same period in 2006. Segment revenues and expenses were affected in 2006 by the pilots’ strike. The increases in the current year in operating income and margin are a result of recovery from the effects of the strike, along with rate increases initiated in 2007 and increased patient transports related to the expansion of new locations in the segment during the past three years. Operating margins were lower in this segment compared to our other segments as it takes some time for these new locations to grow revenues to a level that will cover their costs and produce operating income. Operating margins may also be affected by the mix of payors in any period.

Technical Services – Technical Services revenues were $10.7 million for the year ended December 31, 2007, compared to $9.0 million for the year ended December 31, 2006. The $1.7 million increase was due to increased activity in the segment.

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Direct expense was $6.6 million for the year ended December 31, 2007, compared to $7.1 million for the year ended December 31, 2006.

The Technical Services segment had operating income of $4.0 million for the year ended December 31, 2007, compared to $1.9 million for the year ended December 31, 2006. Operating margins in the Technical Services segment were 38% for the year ended December 31, 2007, compared to 21% for the same period in 2006. Technical Services includes maintenance and repairs performed primarily for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments.

Year Ended December 31, 2006 compared with Year Ended December 31, 2005

Combined Operations

Revenues – Operating revenues for 2006 were $413.1 million compared to $363.6 million for 2005, an increase of $49.5 million, or 14%. Operating revenues increased in the Oil and Gas segment $28.2 million due to an increase in contracted aircraft and an increase due to contractual rate increases. Although revenues increased in the Oil and Gas segment, flight hours were negatively impacted in the fourth quarter by the pilots’ strike, resulting in an estimated revenue decrease of $4.7 million. Operating revenues in the Air Medical segment also increased $21.3 million in 2006, due to the additional operating locations established in 2005 that were in service for all of 2006, although patient transport volume and operating revenues were also negatively impacted in the fourth quarter by the pilots’ strike. We estimate a decrease in operating revenues in the Air Medical segment of $4.2 million as a result of the strike. Revenues in the Technical Services segment were $9.0 million for the year ended December 31, 2006 and December 31, 2005. These items are discussed in the Segment Discussion below.

Other Income and Losses — Gain on equipment dispositions was $1.9 million for 2006 compared to $1.2 million for 2005. Gain or loss on equipment dispositions is related to dispositions of aircraft. Other income increased approximately $6.0 million in 2006 due to interest income on unspent proceeds from securities offerings.

Direct Expenses – Direct expense was $366.3 million for 2006 compared to $299.3 million for 2005, an increase of $67.0 million, or 22%. Included in direct expense are costs incurred as a result of the strike which includes overtime pay and a work completion bonus for working pilots ($5.7 million), other pilot associated costs ($1.9 million), and security costs ($0.6 million).

Direct expense in the Oil and Gas segment increased by $39.9 million due to increased employee costs ($7.2 million) including the strike related amount mentioned above, aircraft parts and repair costs ($3.9 million), aircraft warranty costs ($5.4 million), aircraft rent ($6.7 million), insurance expense ($3.0 million), aircraft fuel ($1.7 million), outside services ($5.1 million), also including ($1.9 million) pilot associated costs mentioned above, and training costs ($3.3 million). The remaining increase ($3.6 million) was due to travel expenses, security services, temporary labor and property taxes. The effect of the strike on this segment, as well as a further discussion of the above items, is described in the Segment Discussion.

Air Medical segment direct expense increased ($25.9 million) due to new locations opened in 2005 being in service for a full twelve months in 2006 as well as an increase related to the pilots’ strike, which is discussed in the Segment Discussion below.

There was also an increase in the Technical Services segment ($1.1 million).

Selling, General and Administrative Expenses – Selling, general and administrative expenses was $27.8 million for 2006 compared to $24.9 million for 2005, an increase of $2.9 million, or 12%. This increase resulted from legal costs and other expenses ($1.5 million) related to the pilots’ strike and other union issues, increased employee costs ($0.5 million), and increased insurance expense ($0.9 million).

Income Taxes — Income tax benefit for 2006 was $0.4 million, compared to income tax expense of $8.1 million for 2005. The effective tax rate was 38% for 2006 compared to 36% for 2005. The 2005 rate benefited from a Hurricane Katrina tax credit of $0.8 million in 2005.

Earnings — Our net loss for 2006 was $0.7 million, compared to net earnings of $14.2 million for 2005. Losses before tax for 2006 were $1.1 million compared to earnings before tax of $22.2 million in 2005. Losses per diluted

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share were $0.05 for 2006 as compared to earnings per diluted share of $1.76 for 2005. The loss for 2006 included $12.8 million related to the early call premium and associated costs for redemption of our 9 3/8% Senior Notes, and also the impact of the pilots’ strike.

Segment Discussion

Oil and Gas — Oil and Gas segment revenues for 2006 were $270.7 million compared to $242.5 million for 2005, an increase of $28.2 million or 12%. The increase was due to increased use of medium and transport aircraft and an increase in contracted aircraft prior to the pilots’ strike and contractual rate increases. Flight hours were 119,503 for 2006 compared to 126,591 for 2005, a decrease of 7,088 hours, which was also attributable to the strike, resulting in an estimated revenue decrease of $4.7 million, and due to the scheduled release of one aircraft from contract by the customer in our foreign operations. The number of aircraft in the segment at December 31, 2006 was 164 compared to 167 aircraft at December 31, 2005. In 2006, we sold 18 light aircraft, which had little flight time in 2006, and had 20 new aircraft delivered. We also converted five aircraft from the Oil and Gas segment for Air Medical use.

Direct expenses in the Oil and Gas segment were $228.8 million for the year ended December 31, 2006, compared to $188.9 million for the prior year, an increase of $39.9 million, or 21%. Included in this increase were increases in employee costs ($7.2 million). Of this amount, $2.5 million was related to increased pilot compensation expense, related to overtime and a work completion bonus, due to the pilots’ strike. There was also an increase in outside services ($5.1 million). Of this amount, $1.9 million was other pilot associated costs related to the strike. Other increases include aircraft parts usage ($2.1 million), aircraft rent ($6.7 million) due to additional aircraft on lease, aircraft warranty costs ($5.4 million) due to additional aircraft covered under the manufacturers’ warranty programs, fuel ($1.7 million) due to increased prices and increased use of medium and transport aircraft, component repair costs ($1.9 million), and insurance expense ($3.0 million) due to a contractual premium refund in 2005 due to favorable loss experience. There were also increases in training costs ($3.3 million), travel expenses ($1.7 million), security services ($0.6 million), which were also partially strike related costs, and other items ($1.2 million).

The Oil and Gas segment’s operating income was $40.8 million for 2006 compared to $52.4 million for 2005. The decrease was due to decreased flight hours and revenues, and increased employee and other strike related costs in the fourth quarter due to the pilots’ strike, and a decrease in flight hour activity and the scheduled release of one aircraft from contract by the customer in our foreign operations.

Air Medical — Air Medical segment revenues were $133.4 million for 2006 compared to $112.1 million for 2005. The increase was due to the additional operations established in 2005 that were in service for all of 2006. Operating revenues in 2006 from the locations opened in 2005 were $37.2 million. Flight hours were 29,980 for 2006 compared to 26,619 for 2005. Patient transports were 20,808 for 2006, compared to 17,200 for 2005. Patient transport volume was negatively impacted by the pilots’ strike in the fourth quarter 2006. We estimated a decrease of approximately 700 transports related to the strike in the fourth quarter resulting in an estimated revenue decrease of $4.2 million. The number of aircraft in the segment was 68 at December 31, 2006, compared to 64 at December 31, 2005.

Direct expenses in the Air Medical segment increased to $130.4 million for 2006 compared to $104.5 million for 2005. During fiscal year 2005, we opened 15 locations, and the increase in direct expense in 2006 reflects a full year of operations at those locations. The $25.9 million increase includes increases in employee costs ($13.8 million) primarily due to new locations opened in the prior year being in service for a full twelve months, but also pilot compensation expenses related to the strike ($3.2 million). There were also increases in fuel costs ($2.3 million), aircraft rent ($0.3 million) and aircraft warranty costs ($1.7 million) as additional aircraft were added to the manufacturers’ warranty programs, insurance expense ($1.2 million), depreciation expense ($2.5 million), and other operating costs ($0.9 million).

Selling, general and administrative expenses was $7.4 million for the year ended December 31, 2006, compared to $6.5 million for the year ended December 31, 2005.

The Air Medical segment operating loss was $4.4 million for 2006 compared to operating income of $1.2 million for 2005. Although the Air Medical segment revenues increased in 2006, the decrease in transports in the fourth quarter related to the strike resulted in an estimated revenue decrease of $4.2 million. Expenses related to the strike also increased an estimated $3.2 million.

Technical Services — Technical Services segment revenues were $9.0 million in 2006 and 2005.

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Direct expenses were $7.1 million for 2006 compared to $5.9 million for 2005, which was due to the recategorization of contract revenue and expense of certain contractual work for third parties that was previously recorded in the Oil and Gas segment.

The Technical Services segment had operating income of $1.9 million for December 31, 2006, compared to $3.1 million for December 31, 2005.

Liquidity and Capital Resources

General

Our ongoing liquidity requirements arise primarily from the funding of working capital needs, such as the acquisition or leasing of aircraft, the maintenance and refurbishment of aircraft, improvement of facilities, and acquisition of equipment and inventory. Our principal sources of liquidity historically have been net cash provided by our operations and borrowings under our revolving credit facility, as augmented in recent years by the issuance of our Senior Notes in 2002, which were refinanced in 2006, and the sale of non-voting common stock in 2005 and 2006.

As we grow our operations, we continually monitor the capital resources available to meet our future financial obligations, planned capital expenditures and liquidity. We also review acquisition opportunities on an ongoing basis. If we were to make a significant acquisition for cash, we would need to obtain additional equity or debt financing.

Cash Flow

Our cash position at December 31, 2007 was $1.4 million, compared to $0.8 million at December 31, 2006. Short-term investments were $63.0 million at December 31, 2007, compared to $153.4 million at December 31, 2006. Working capital was $176.6 million at December 31, 2007, as compared to $254.1 million at December 31, 2006, a decrease of $77.5 million. The decrease in working capital was primarily a result of a decrease in short-term investments of $90.4 million and an increase in accounts receivable of $8.8 million. The decrease in short-term investments was primarily a result of spending a substantial portion of the proceeds from our April 2006 stock offering to acquire new aircraft.

Net cash provided by operating activities was $25.2 million for 2007 compared to $30.3 million for 2006, a decrease of $5.1 million. The decrease was due primarily to changes in operating assets and liabilities of $6.1 million, an increase in net earnings of $28.9 million, in part due to the loss of $12.8 million recorded in the second quarter of 2006 as a result of refinancing our 9 3/8% Senior Notes, a decrease in depreciation and amortization expense of $0.3 million, an increase in the deferred tax provision of $18.1 million, and an increase in gain on sales of assets of $33.0 million. The increase in deferred tax is due to the tax expense associated with the earnings before tax of $45.7 million in the current year compared to a tax benefit associated with the loss before tax of $1.1 million in the prior year. Capital expenditures were $159.7 million for 2007 compared to $123.3 million for 2006. Capital expenditures for 2007 were $126.5 million for aircraft purchases, $22.8 million for refurbishments and equipment installations for new aircraft, $10.4 million for facility improvements, operating equipment, engine spares, and medical equipment. Capital expenditures for 2006 were $94.7 million for aircraft purchases, $18.3 million for refurbishments and equipment installations for new aircraft, $10.3 million for facility improvements, operating equipment, engine spares, and medical equipment. Gross proceeds from aircraft sales were $58.1 million for 2007 compared to $36.8 million for 2006.

Financing Activities

On April 12, 2006, we completed the sale of 4,287,920 non-voting common shares at $35.00 per share and on May 1, 2006, we completed the sale of another 578,680 shares pursuant to the underwriters’ over-allotment option, also at $35.00 per share. Proceeds from the offering were $160.7 million, net of expenses, and were used to fund the acquisition of aircraft delivered in 2006 and 2007. Also on April 12, 2006, we issued $200 million of 7.125% Senior Notes due 2013. Net proceeds of $196.0 million were used to repurchase $184.8 million of our existing 9 3/8% Senior Notes, which were tendered by April 12, 2006, at a total cost of $201.6 million including an early call premium and accrued interest. We redeemed the remaining $15.2 million of 9 3/8% Senior Notes on May 1, 2006,

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at a redemption price of 104.688% of the face amount plus accrued interest. As a result of the refinancing of the 9 3/8% Senior Notes, we recorded a pretax charge of $12.8 million ($7.7 million, net of tax) in the quarter ended June 30, 2006, which consisted of a $9.8 million early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses of the tender for the outstanding notes.

Credit Facility

We have a $35 million revolving credit facility with a commercial bank that expires on September 1, 2009. At December 31, 2007, there were no borrowings and $4.6 million in letters of credit outstanding under the facility. The facility includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of December 31, 2007, we were in compliance with these covenants.

Contractual Obligations

The table below sets out our contractual obligations as of December 31, 2007 related to operating lease obligations, purchase commitments, credit facility, and the 7.125% Senior Notes due 2013. The operating leases are not recorded as liabilities on the balance sheet, but payments are treated as an expense as incurred. Each contractual obligation included in the table contains various terms, conditions, or covenants which, if violated, accelerate the payment of that obligation. We currently lease eighteen aircraft included in the lease obligations below.

			Payment Due by Year
													Beyond
	Total		2008		2009		2010		2011		2012		2012
	(Thousands of dollars)
Aircraft Purchase commitments (1)	$	153,967	$	72,468	$	81,499	$	—	$	—	$	—	$	—
Aircraft Purchase commitments (2)		127,407		20,255		107,152		—		—		—		—
Aircraft lease obligations		169,150		18,274		18,274		18,876		20,144		20,811		72,771
Other lease obligations		21,211		3,463		2,726		2,325		1,897		1,442		9,358
Long term debt		200,000		—		—		—		—		—		200,000
	$	671,735	$	114,460	$	209,651	$	21,201	$	22,041	$	22,253	$	282,129

(1)	These commitments are for aircraft that we intend to fund from existing cash, short-term investments, and operating leases, as required.
(2)	These commitments are for aircraft that we intend to finance with an operating lease. Once the leases are entered into, the lease payments will be made over the term of the leases.

Estimated interest costs on the debt obligations set forth above, without considering any additional debt that may be obtained relative to purchase commitments for aircraft, are $14.5 million for 2008 and each successive year through 2012, including amortization of debt issuance costs.

At December 31, 2007, we had an order for six additional transport category aircraft, with scheduled delivery dates throughout 2008 and 2009. The approximate cost for these aircraft is $127.4 million.

At December 31, 2007, we also had orders for 30 additional aircraft with a total cost of $154.0 million and scheduled delivery dates throughout 2008 and 2009.

We believe that cash flow from operations will be sufficient to fund operating requirements and required interest payments on the 7.125% Senior Notes for the next twelve months. We have capital requirements for aircraft on order totaling $154.0 million over 2008 and 2009, which we intend to fund from existing cash, short-term investments, and operating leases, as required. The balance of the aircraft purchase commitment of $127.4 million will be financed with operating leases.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowances for doubtful accounts, inventories of spare parts, long-lived assets, income taxes, and self-insurance liabilities. We base our estimates on historical experience and on various other assumptions 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, and the differences may be material. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.

Revenues related to Air Medical Services are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when services are provided. We estimate contractual allowances and uncompensated care based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute an 18 month historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. There have not been any material adjustments to the estimated amounts recorded for the years ended December 31, 2007, 2006, and 2005.

We maintain a significant parts inventory to service our own aircraft and the aircraft and components of customers. Portions of that inventory are used parts that are often exchanged with parts removed from aircraft or components and reworked to a useable condition. We use systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. If our valuation of these parts should be significantly different from amounts ultimately realizable or if we discontinue using or servicing certain aircraft models, then we may have to record a write-down of our inventory. We also record provisions against inventory for obsolescent and slow-moving parts, relying principally on specific identification of such inventory. If we fail to identify such parts, additional provisions may be necessary.

Our principal long-lived assets are aircraft. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows that we expect the asset to generate. When an asset is determined to be impaired, we recognize the impairment amount, which is the amount by which the carrying value of the asset exceeds its estimated fair value. Similarly, we report assets that we expect to sell at the lower of the carrying amount or fair value less costs to sell. Future adverse market conditions or poor operating results could result in an inability to recover the current carrying value of certain long-lived assets, thereby possibly requiring an impairment charge in the future.

Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).

We must make estimates for certain of our liabilities and expenses, losses, and gains related to self-insured programs, insurance deductibles, and good-experience premium returns. Our group medical insurance program is largely self-insured, and we use estimates to record our periodic expenses related to that program. We also carry deductibles on our workers’ compensation program and aircraft hull and liability insurance, and poor experience or higher accidents rates could result in additional recorded losses.

We estimate what our effective tax rate will be for the full year and record a quarterly income tax expense in accordance with the anticipated effective annual tax rate. As the year progresses, we continually refine our estimate

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based upon actual events and income before income taxes by jurisdiction during the year. This process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax expense during the quarter in which the change in estimate occurs so that the year-to-date expense equals the annual rate.

New Accounting Pronouncements

For a discussion of new accounting pronouncements applicable to the Company, see Note 1 to the Consolidated Financial Statements.

Environmental Matters

We have an aggregate estimated liability of $0.2 million as of December 31, 2007 and 2006 for environmental remediation costs that are probable and estimable. We have conducted environmental surveys of our former Lafayette Facility, which we vacated in 2001, and have determined that limited soil and groundwater contamination exists at the facility. We have installed groundwater monitoring wells at the facility and periodically monitor and report on the contamination. In May 2003, we submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination. In April, 2006 the Site Assessment was updated to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, we will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. We have not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, we believe the ultimate remediation costs for the former Lafayette facility will not be material to our consolidated financial position, results of operations, or cash flows.

During 2004, LDEQ advised us that groundwater contaminants impacting monitor wells at the PHI Lafayette Heliport were originating from an off-site location and that we would no longer be required to perform further monitoring at the site. Subsequently, based upon site investigation work performed by the Lafayette Airport Commission, the source of the contamination was identified as residing at another location, for which PHI is not responsible. The Lafayette Airport Commission has begun remediation of the PHI Lafayette Heliport.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the past we made limited use of derivative financial instruments to manage interest rate risk. When used, all derivatives for interest rate risk management were closely monitored by our senior management. We do not hold derivatives for trading purposes and we do not use derivatives with leveraged or complex features. Derivative instruments were transacted either with creditworthy major financial institutions or over national exchanges. The Company has not engaged in activities involving financial derivatives during the years 2007, 2006, and 2005.

The market value of the Senior Notes will vary as changes occur in market interest rates, the remaining maturity of the Senior Notes, and our credit-worthiness. At December 31, 2007, the market value of the Notes was $191.0 million. A hypothetical 100 basis-point increase in the Senior Notes imputed rate at December 31, 2007 would have resulted in a market value decline of approximately $8.0 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
PHI, Inc.
Lafayette, Louisiana

We have audited the accompanying consolidated balance sheets of PHI, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PHI, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

New Orleans, Louisiana
March 11, 2008

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PHI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

	December 31,		December 31,
	2007		2006
ASSETS
Current Assets:
Cash and cash equivalents	$	1,425	$	820
Short-term investments		62,970		153,414
Accounts receivable – net:
Trade		95,111		87,366
Other		2,973		1,928
Inventories of spare parts and supplies		55,831		55,596
Other current assets		11,194		7,930
Refundable income taxes		525		635
Total current assets		230,029		307,689
Other		27,148		23,816
Property and equipment, net		484,119		369,465
Total Assets	$	741,296	$	700,970
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	28,454	$	35,815
Accrued liabilities		24,942		17,775
Total current liabilities		53,396		53,590
Long-term debt		200,000		205,500
Deferred income taxes		51,644		32,828
Other long-term liabilities		7,587		8,927
Commitments and contingencies (Note 9)
Shareholders’ Equity:
Voting common stock – par value of $0.10; authorized shares of 12,500,000		285		285
Non-voting common stock – par value of $0.10; authorized shares of 12,500,000		1,242		1,242
Additional paid-in capital		291,037		290,695
Accumulated other comprehensive income		61		77
Retained earnings		136,044		107,826
Total shareholders’ equity		428,669		400,125
Total Liabilities and Shareholders’ Equity	$	741,296	$	700,970

The accompanying notes are an integral part of these consolidated financial statements.

27

PHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Thousands of dollars and shares, except per share data)

	Year Ended		Year Ended			Year Ended
	December 31,		December 31,			December 31,
	2007		2006			2005
Operating revenues	$	446,406	$	413,118		$	363,610
Gain on disposition of assets, net		34,953		1,910			1,173
Other		5,098		8,036			2,057
		486,457		423,064			366,840
Expenses:
Direct expenses		394,421		366,272			299,263
Selling, general and administrative expenses		30,226		27,839			24,896
Interest expense		16,121		17,243			20,448
Loss on debt restructuring		—		12,790			—
		440,768		424,144			344,607
Earnings (loss) before income taxes		45,689		(1,080	)		22,233
Income tax expense (benefit)		17,471		(413	)		8,079
Net earnings (loss)	$	28,218	$	(667	)	$	14,154
Earnings (loss) per share
Basic	$	1.85	$	(0.05	)	$	1.76
Diluted	$	1.85	$	(0.05	)	$	1.76
Weighted average shares outstanding:
Basic		15,277		13,911			8,040
Diluted		15,286		13,911			8,063

The accompanying notes are an integral part of these consolidated financial statements.

28

PHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of dollars and shares)

											Accumulated						Total
	Voting				Non-Voting				Additional		Other Com-						Share-
	Common Stock				Common Stock				Paid-in		prehensive			Retained			Holders’
	Shares		Amount		Shares		Amount		Capital		Income			Earnings			Equity
Balance at Dec. 31, 2004		2,852	$	285		2,531	$	253	$	15,098	$	—		$	94,339		$	109,975
Stock issuance, net		—		—		4,887		489		113,352		—			—			113,841
Stock options exercised		—		—		—		—		1,081		—			—			1,081
Net earnings		—		—		—		—		—		—			14,154			14,154
Balance at Dec. 31, 2005		2,852		285		7,418		742		129,531		—			108,493			239,051
Stock issuance, net		—		—		4,867		487		160,235		—			—			160,722
Other		—		—		139		13		929		—			—			942
SFAS No. 158 incremental effect		—		—		—		—		—		77			—			77
Net loss		—		—		—		—		—		—			(667	)		(667	)
Balance at Dec. 31, 2006		2,852		285		12,424		1,242		290,695		77			107,826			400,125
Stock options exercised		—		—		—		—		342		—			—			342
SFAS No. 158 incremental effect		—		—		—		—		—		(16	)		—			(16	)
Net earnings		—		—		—		—		—		—			28,218			28,218
Balance at Dec. 31, 2007		2,852	$	285		12,424	$	1,242	$	291,037	$	61		$	136,044		$	428,669

The accompanying notes are an integral part of these consolidated financial statements.

29

PHI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)

	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2007			2006			2005
Operating activities:
Net earnings (loss)	$	28,218		$	(667	)	$	14,154
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		30,047			30,297			27,133
Deferred income taxes		16,498			(1,631	)		6,415
Gain on asset dispositions		(34,953	)		(1,910	)		(1,173	)
Loss on debt restructuring		—			12,790			—
Other		868			806			1,411
Changes in operating assets and liabilities:
Accounts receivable		(8,790	)		1,985			(31,109	)
Inventories		(1,492	)		(7,473	)		(8,898	)
Refundable income taxes		110			(213	)		—
Other assets		(1,824	)		177			(2,313	)
Accounts payable and accrued liabilities		(2,100	)		(6,679	)		23,049
Other long-term liabilities		(1,356	)		2,842			(649	)
Net cash provided by operating activities		25,226			30,324			28,020
Investing activities:
Purchase of property and equipment		(159,715	)		(123,253	)		(96,165	)
Proceeds from asset dispositions		58,105			36,809			10,751
Purchase of short-term investments		(134,241	)		(186,339	)		(97,950	)
Proceeds from sale of short-term investments		224,685			99,450			45,900
Other		(8,298	)		(5,595	)		—
Net cash used in investing activities		(19,464	)		(178,928	)		(137,464	)
Financing activities:
Proceeds of debt issuance – Senior Notes		—			200,000			—
Premium and costs to retire debt early		—			(10,208	)		—
Repayment of Senior Notes		—			(200,000	)		—
Debt issuance costs		—			(4,857	)		—
Payments on long-term debt		—			(1,000	)		(1,000	)
Proceeds from line of credit		37,200			181,900			114,875
Payments on line of credit		(42,700	)		(179,700	)		(119,850	)
Proceeds from stock issuance		—			161,155			115,162
Less related fees and expenses		—			(433	)		(1,265	)
Proceeds from exercise of stock options		343			—			1,025
Other		—			(469	)		—
Net cash (used in) provided by financing activities		(5,157	)		146,388			108,947
Increase (decrease) in cash and cash equivalents		605			(2,216	)		(497	)
Cash and cash equivalents, beginning of year		820			3,036			3,533
Cash and cash equivalents, end of year	$	1,425		$	820		$	3,036
Supplemental Disclosures Cash Flow Information
Accrued payables related to purchases of property and equipment	$	1,906		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

30

PHI, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Nature of Operations, Basis of Consolidation, and Other General Principles
	Since its inception, PHI, Inc.’s primary business has been to transport personnel and, to a lesser extent, parts and equipment, to, from and among offshore facilities for customers engaged in the oil and gas exploration, development, and production industry. The Company also provides air medical transportation services for hospitals, medical programs, and aircraft maintenance services to third parties.
	The consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company”) after the elimination of all intercompany accounts and transactions.
	A principal stockholder has substantial control. Al A. Gonsoulin, Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of the total voting power. As a result, he exercises control over the election of PHI’s directors and the outcome of matters requiring a stockholder vote.
	Revenue Recognition
	The Company recognizes revenue related to aviation transportation services after the services are performed or the contractual obligations are met. Aircraft maintenance services revenues are recognized at the time the repair or services work is completed. Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors when the services are provided.
	Use of Estimates
	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 the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	Estimates Include:

Allowance for doubtful accounts receivable,
Estimates of contractual allowances applicable to billings in the Air Medical segment,
Valuation reserve related to obsolete and excess inventory,
Depreciable lives and salvage values of property and equipment,
Valuation allowance for deferred tax assets,
Insurance reserves for hull liability and health insurance care claims, and
Impairment of long lived assets.

Cash Equivalents

The Company considers cash equivalents to include demand deposits and investments with original maturity dates of three months or less. The Company’s cash and cash equivalents are maintained in one financial institution in amounts that typically exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk.

Short-term Investments

Short-term investments consist primarily of money market funds, which represent funds available for current operations. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” these short-term investments are classified as available for sale. The Company has not recorded any unrealized gains or losses associated with short-term investments as the carrying value approximates fair value at December 31, 2007 and 2006.

31

Investments included in Other Assets as detailed in Note 7 are comprised of mutual funds. These investments are amounts related to the liability for the Officers’ Deferred Compensation Plan.

Inventories of Spare Parts and Supplies

The Company’s inventories are stated at the lower of average cost or market and consist primarily of spare parts. Portions of the Company’s inventories are used parts that are often exchanged with parts removed from aircraft, reworked to a useable condition according to manufacturers’ and FAA specifications, and returned to inventory. The Company uses systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. Reusable aircraft parts are included in inventory at the average cost of comparable parts. The rework costs are expensed as incurred. The Company also records an allowance for obsolete and slow-moving parts, relying principally on specific identification of such inventory. Valuation reserves related to obsolescence and slow-moving inventory were $7.5 million and $7.3 million at December 31, 2007 and 2006, respectively.

Property and Equipment

The Company records its property and equipment at cost less accumulated depreciation. For financial reporting purposes, the Company uses the straight-line method to compute depreciation based upon estimated useful lives of five to fifteen years for flight equipment and three to ten years for other equipment. Leasehold improvements are amortized over the shorter of the life of the respective lease, or the asset, and range from six to ten years. The salvage value used in calculating depreciation of aircraft ranges from 30% to 54%. The Company uses accelerated depreciation methods for tax purposes. The cost of scheduled inspections and modifications for flight equipment are charged to maintenance expense as incurred. Modifications that enhance the operating performance or extend the useful lives of the aircraft are capitalized and depreciated over the remaining life of the asset. Upon selling or otherwise disposing of property and equipment, the Company removes the cost and accumulated depreciation from the accounts and reflects any resulting gain or loss in earnings at the time of sale or other disposition.

Effective July 1, 2007, the Company changed the estimated residual value of certain aircraft from 40% to 54%. The Company believes the revised amounts reflect their historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on the Company’s experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for the year ended December 31, 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).

The Company had previously reassessed the salvage values applicable to major modifications to aircraft at January 1, 2005 based on updated estimates derived from recent aircraft sales. The adjustment for the year 2005 resulted in a decrease in depreciation expense ($1.6 million).

The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows that it expects the asset to generate. When an asset is determined to be impaired, the Company recognizes that impairment amount, which is measured by the amount that the carrying value of the asset exceeds its fair value. Similarly, the Company reports assets that it expects to sell at the lower of the carrying amount or fair value less costs to sell.

Self-Insurance

The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. The Company’s insurance retention is $200,000 per claim through December 31, 2007. As of December 31, 2007 and 2006, the Company had $1.5 million and $1.3 million, respectively, of accrued liabilities related to health care claims.

32

During 2005, the Company established an offshore insurance captive to realize savings in reinsurance costs on its insurance premiums. Amounts paid to the captive in 2007 and 2006 totaled $1.5 million and $3.2 million, respectively. The financial position and operations of the insurance captive were not significant in 2007 nor 2006. The captive is fully consolidated in the accompanying financial statements.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of short-term investments and trade accounts receivable. Short-term investments at December 31, 2007 include money market securities. The Company does not believe significant credit risk exists with respect to these securities at December 31, 2007.

PHI conducts a majority of its business with major and independent oil and gas exploration and production companies with operations in the Gulf of Mexico. The Company also provides services to major medical centers and US governmental agencies. The Company continually evaluates the financial strength of its customers but generally does not require collateral to support the customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. Amounts are charged off as uncollectible when collection efforts have been exhausted. The allowance for doubtful accounts was $0.1 million at December 31, 2007 and 2006. The Company’s largest oil and gas customer accounted for 15%, 17%, and 14% of consolidated operating revenues for years ended December 31, 2007, 2006, and 2005, respectively. The Company also carried accounts receivable from this same customer totaling 12% and 14% of net trade receivable on December 31, 2007 and 2006, respectively.

Trade receivables representing amounts due pursuant to air medical services are carried net of an allowance for estimated contractual adjustments on unsettled invoices. The Company monitors its collection experience by payor category within the Air Medical segment and updates its estimated collections to be realized as deemed necessary.

Stock Compensation

Effective January 1, 2006, the Company adopted the accounting policies described in Statement of Financial Accounting Standards (“SFAS”) No. 123 (R),”Share Based Payment.” The Company chose to use the modified prospective method of transition, and accordingly, no adjustments to prior period financial statements were made. SFAS No. 123 (R) superseded Accounting Principles Board (“APB’’) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amended SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Prior to January 1, 2006, the Company accounted for share-based payments to employees using the intrinsic value method of and, as such, generally recognized no compensation expense for employee stock options. In September 2001, the Company underwent a change of control and as a result, all awards issued prior to the change of control became fully vested. The Company has not issued any shares, options or rights under its stock plan since 2001. As a result, no pro forma information for 2005 is necessary under SFAS No. 123. As no employee stock options were granted in 2007 and 2006, the adoption of SFAS No. 123 (R) had no impact on the Company’s results of operations for the years ended December 31, 2007 and 2006. The impact on future periods will be dependent on levels of share based payments granted in the future.

Stock-based employee compensation expense relates to restricted stock grants and stock options that were settled for cash. The employee compensation expense for stock grants and options settled for cash was $0 for 2007, $0 for 2006, and $122,498 for 2005. There have been no stock awards granted since 2001.

Income Taxes

The Company provides for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities measurement uses enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The

33

Company recognizes the effect of any tax rate changes in income of the period that included the enactment date.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. On January 1, 2007, the Company adopted the provisions of FIN 48. Based on the Company’s evaluation, the Company concluded that there are no significant uncertain tax positions requiring recognition in their financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2001 to 2006, the tax years which remained subject to examination by major tax jurisdictions.

Based on a review and evaluation at December 31, 2007, it was determined that there are no material tax positions requiring recognition for the current tax year. The Company’s evaluation was performed for the tax years ended December 31, 2004 to 2007, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2007.

Earnings per Share

The Company computes basic earnings per share by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share computation uses the weighted average number of shares outstanding adjusted for incremental shares attributed to dilutive outstanding options to purchase common stock.

Deferred Financing Costs

Costs of obtaining long term debt financing are deferred and amortized ratably over the term of the related debt agreement.

Derivative Financial Instruments

The Company has not engaged in activities involving financial derivatives during the years 2007, 2006, and 2005.

New Accounting Pronouncements

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged provided that the reporting entity has not yet issued financial statements for that fiscal year including financial statements for an interim period within that fiscal year. The Company is assessing SFAS No. 157 and has not determined yet the impact that the adoption of SFAS No. 157 will have on its results of operations, financial position, or cash flows.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements when evaluating materiality. The application of the guidance in SAB No. 108 did not have a significant impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115” (“SFAS No. 159”). SFAS No. 159 permits the Company to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). The Company would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is assessing SFAS No. 159 and has not determined yet the impact that the adoption of SFAS No. 159 will

34

have on its results of operations, financial position, or cash flows.

Comprehensive Income

Comprehensive Income includes net earnings and other comprehensive income items such as revenues, expenses, gains or losses that under generally accepted accounting principles are included in comprehensive income, but excluded from net income.

The following table summarizes the components of total comprehensive income (net of taxes):

	Year Ended December 31,
	2007			2006			2005
	(Thousands of dollars)
Net earnings (loss)	$	28,218		$	(667	)	$	14,154
SFAS No. 158 adjustment		(16	)		77			—
Comprehensive income (loss)	$	28,202		$	(590	)	$	14,154

	Goodwill
	Goodwill represents costs in excess of the fair value acquired in connection with purchase business combinations. Goodwill arose in connection with the acquisition of a company related to the planned expansion of the Air Medical segment. In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangibles, the Company tests its goodwill for impairment annually on December 31 or if impairment indicators are present. The impairment evaluation for goodwill is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference. The Company performed the test at December 31, 2007 and determined that no impairment charge for goodwill was required.
(2)	PROPERTY AND EQUIPMENT
	The following table summarizes the Company’s property and equipment at December 31, 2007 and 2006.

	December 31,			December 31,
	2007			2006
	(Thousands of dollars)
Flight equipment	$	583,076		$	480,934
Other		81,829			74,638
		664,905			555,572
Less accumulated depreciation and amortization		(180,786	)		(186,107	)
Property and equipment, net	$	484,119		$	369,465

Gain on equipment dispositions was $35.0 million for 2007 compared to $1.9 million for 2006. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet the Company’s strategic needs.

35

(3)	ACCRUED LIABILITIES
	Accrued liabilities consisted of the following:

	December 31,		December 31,
	2007		2006
	(Thousands of dollars)
Salaries & Wages	$	9,654	$	4,141
Vacation Payable		3,103		2,583
Interest		2,974		3,045
Helicopter Lease		2,821		—
Group Medical		1,480		1,260
Transportations Tax		1,195		738
Workers Compensation		1,332		1,158
Other		2,383		4,850
Total Accrued Liabilities	$	24,942	$	17,775

(4)	LONG-TERM DEBT
	On April 12, 2006, the Company issued $200.0 million of 7.125% Senior Notes that mature in 2013. These Notes were offered and sold in a private placement under Rule 144A and Regulation S under the Securities Act of 1933. Net proceeds of $196.0 million were used to repurchase $184.8 million of the Company’s outstanding 9 3/8% Senior Notes due 2009 pursuant to a tender offer that also closed on April 12, 2006. The total cost to repurchase those notes was $201.6 million, including the tender offer premium and accrued interest. The Company called for redemption on May 1, 2006, the remaining $15.2 million of 9 3/8% notes outstanding, at a redemption price of 104.688% of their face amount plus accrued and unpaid interest. Interest on the 7.125% notes is payable semi-annually on April 15 and October 15, and those notes mature April 15, 2013. The estimated annual interest cost of the new notes is $14.3 million, excluding amortization of issuance costs, which represents a reduction in annual interest cost on the notes of $4.5 million. As a result of the early redemption of the 9 3/8% notes, a pretax charge of $12.8 million ($7.7 million, net of tax) was recorded as a charge for debt restructuring in the quarter ended June 30, 2006, which consisted of $9.8 million for the early call premium, $2.6 million of unamortized issuance costs, and $0.4 million in related expenses for the tender of outstanding notes.
	The new notes contain restrictive covenants, including limitations on indebtedness, liens, dividends, repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers and consolidations or sales of assets. The Senior Notes are fully and unconditionally guaranteed on a joint and several senior basis by all of the Company’s Guarantor Subsidiaries, which are all of the domestic subsidiaries. See Note 14 of the Notes to Consolidated Financial Statements. The Company was in compliance with the covenants applicable to these notes as of December 31, 2007 and 2006.
	The Company has a $35 million revolving credit facility with a commercial bank, which is scheduled to expire on September 1, 2009. At December 31, 2007, the Company had no borrowings under the revolving credit facility, and the Company had $5.5 million under the credit facility at December 31, 2006. The Company had four letters of credit for $4.6 million outstanding at December 31, 2007, and five letters of credit for $5.1 million outstanding at December 31, 2006. The credit agreement permits both prime rate based borrowings and “LIBOR” rate borrowings plus a spread. The spread for LIBOR borrowings is from 1.25% to 3.0%. The Company will pay an annual 0.25% commitment fee on the unused portion of the revolving credit facility. The credit agreement includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of December 31, 2007 and 2006, the Company was in compliance with these covenants. The credit agreement is collateralized by accounts receivable and inventory.
	Cash paid for interest was $15.4 million, $16.5 million, and $19.5 million, for the years ended December 31, 2007, 2006, and 2005, respectively.

36

(5)	INCOME TAXES
	Income tax expense (benefit) is composed of the following:

	Year Ended		Year Ended			Year Ended
	December 31,		December 31,			December 31,
	2007		2006			2005
	(Thousands of dollars)
Current
Federal	$	—	$	—		$	343
State		—		—			(50	)
Foreign		973		1,175			1,371
Deferred — principally Federal		16,498		(1,588	)		6,415
Total	$	17,471	$	(413	)	$	8,079

Income tax expense (benefit) as a percentage of pre-tax earnings varies from the effective Federal statutory rate of 35% as a result of the following:

	Year Ended					Year Ended						Year Ended
	December 31, 2007					December 31, 2006						December 31, 2005
	(Thousands of dollars, except percentage amounts)
	Amount			%		Amount			%			Amount			%
Income taxes at statutory rate	$	15,991			35	$	(367	)		(34	)	$	7,559			34
Increase (decrease) in taxes resulting from:
Hurricane relief credit		(134	)		—		—			—			(537	)		(2	)
Effect of state income taxes		1,479			3		(35	)		(3	)		762			3
Other items – net		135			—		(11	)		(1	)		295			1
Total	$	17,471			38	$	(413	)		(38	)	$	8,079			36

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:

	December 31,			December 31,
	2007			2006
	(Thousands of dollars)
Deferred tax assets:
Deferred compensation	$	1,889		$	1,644
Foreign tax credits		6,466			5,792
Vacation accrual		2,563			962
Inventory valuation		4,065			3,355
Workman’s compensation reserve		—			323
Allowance for uncollectible accounts		19			19
Alternative minimum tax credit		—			343
Hurricane relief credit		1,083			814
Other		770			720
Net operating loss		28,464			34,192
Total deferred tax assets		45,319			48,164
Valuation allowance – tax credit carryforwards		(1,945	)		(2,142	)
Total deferred tax assets, net		43,374			46,022
Deferred tax liabilities:
Tax depreciation in excess of book depreciation		(88,331	)		(74,326	)
Total deferred tax liabilities		(88,331	)		(74,326	)
Net deferred tax liabilities	$	(44,957	)	$	(28,304	)

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	A valuation allowance was recorded against certain foreign tax credits paid in 2004 and prior as management believes it is more likely than not that the deferred tax asset related to certain foreign tax credit carryforwards will not be realized during their carryforward period. The estimated future U.S. taxable income, after utilization of the available net operating loss carryforwards, will limit the ability of the Company to utilize the foreign tax credit carryforwards during their carryforward period. Due to recent changes in the tax laws extending the credit carryforward period, management believes that a valuation allowance is not necessary for foreign tax credits generated after 2005. A tax credit of $0.1 million was realized in 2006 and 2007 as a result of Hurricanes Katrina and Rita Legislation. At December 31, 2007 and 2006, other current assets include $6.6 million and $4.5 million, respectively, of deferred tax assets.
	The Company has net operating loss carryforwards (“NOLs”), of approximately $72.0 million that, if not used will expire beginning in 2022 through 2027. Additionally, for state income tax purposes, the Company has NOLs of approximately $84.0 million available to reduce future state taxable income. These NOLs expire in varying amounts beginning in 2012 through 2027, the majority of which expires in 2017 and through 2020. Most of these NOLs arose from accelerated tax depreciation deductions related to substantial aircraft additions since 2002.
	Income taxes paid were approximately $0.02 million, $0.1 million, and $0.1 million, for the years ended December 31, 2007, 2006, and 2005, respectively. The Company received net income tax refunds of approximately $0.9 million, $0.3 million and $0.8 million during the years ended December 31, 2007, 2006 and 2005, respectively.
(6)	EMPLOYEE BENEFIT PLANS
	Savings and Retirement Plans
	The Company maintains an Employee Savings Plan under Section 401(k) of the Internal Revenue Code. The Company matches 2% for every 1% of an employee’s salary deferral contribution, not to exceed 3% of the employee’s compensation. The Company contributions were $7.0 million for the year ended December 31, 2007, $6.2 million for the year ended December 31, 2006 and $5.4 million for the year ended December 31, 2005.
	The Company maintains a Supplemental Executive Retirement Plan (“SERP”). During January 2006, selected active employees were given a substitute benefit in the Officer Deferred Compensation Plan based on a calculated present value of the participant’s interest in the SERP, except for the four remaining retired participants. As a result, approximately $2.0 million of the SERP liability was transferred to the Deferred Compensation Liability in 2006.
	As of December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132(R),” for its SERP plan.
	The Company recorded the following plan costs for the years ended December 31, 2007, 2006, and 2005.

	Years Ended December 31,
	2007			2006		2005
	(Thousands of dollars)
Service cost	$	—		$	—	$	259
Interest cost		56			64		124
Recognized actuarial (gain) loss		(4	)		62		53
Net periodic plan cost	$	52		$	126	$	436

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The benefit obligation, funded status, and assumptions of the plan on December 31, 2007 and 2006 were as follows:

	December 31,
	2007			2006
	(Thousands of dollars)
Change in benefit obligation:
Benefit obligation at the beginning of the year	$	1,063		$	3,413
Service cost		—			—
Interest cost		56			64
Actuarial loss (gain)		24			(18	)
Benefits paid		(131	)		(384	)
Transferred to deferred compensation		—			(2,012	)
Benefit obligation at the end of the year	$	1,012		$	1,063

	December 31,
	2007			2006
	(Thousands of dollars)
Reconciliation of funded status
Unfunded status		(1,012	)		(1,063	)
Unrecognized actuarial gains		(101	)		(129	)
Total liability included in other long term liabilities on the consolidated balance sheet	$	(1,113	)	$	(1,192	)
Weighted average assumptions
Discount rate		5.4	%		5.8	%

Amounts recognized in accumulated other comprehensive income consists of approximately $101,000 and $129,000 pre-tax in unrecognized actuarial gain in 2007 and 2006, respectively.

The SERP plan is an unfunded arrangement. However, the Company has purchased life insurance contracts on the lives of the participants in anticipation of using the life insurance’s cash values and death benefits to help fulfill the obligations of the plan. The Company, as owner of such policies, may sell or redeem the contracts at any time without any obligation to the plan participants. The Company recorded expenses of approximately $0.1 million for 2007, $0.2 million for 2006, and $0.5 million for 2005 related to the life insurance contracts. Cash values of the life insurance contracts, recorded in other assets, are $0.5 million at December 31, 2007 and $0.4 million at December 31, 2006.

The Company maintains an Officer Deferred Compensation Plan that permits key officers to defer a portion of their compensation. The plan is nonqualified and funded. The Company has established a separate account for each participant, which is invested and reinvested from time to time in investments that the participant selects from a list of eligible investment choices. Earnings and losses on the book reserve accounts accrue to the plan participants. Liabilities for the plan are included in other long-term liabilities, and the corresponding investment accounts are included in other assets. Aggregate amounts deferred under the plans were $3.8 million and $3.2 million, respectively, for the years December 31, 2007 and 2006.

Stock Based Compensation

Under the PHI 1995 Incentive Plan (the “1995 Plan”), the Company is authorized to issue up to 175,000 shares of voting common stock and 575,000 shares of non-voting common stock. The Compensation Committee of the Board of Directors is authorized under the 1995 Plan to grant stock options, restricted stock, stock appreciation rights, performance shares, stock awards, and cash awards. The exercise prices of the stock option grants are equal to the fair market value of the underlying stock at the date of grant. The 1995 Plan also allows awards under the plan to fully vest upon a change in control of the Company. In September of 2001, the Company underwent a change of control as defined in the 1995 plan and as a result, all awards issued prior to the change of control became fully vested.

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During the year ended December 31, 2001, the Company granted 20,000 non-voting restricted shares and 150,000 non-voting stock options under the 1995 Plan. The non-voting restricted shares had a fair value of $11.06 on the date of issue and became unrestricted during 2001. The non-voting stock options are 100% vested and expire on September 1, 2010. Such options were exercised in 2005. The Company has not issued any shares, options or rights under the 1995 Plan since 2001.

At December 31, 2007, there were 116,520 voting shares and 183,802 non-voting shares available for issuance under the 1995 Plan. The Company did not record any compensation expense related to the 1995 Plan for the years ended December 31, 2007 and 2006, and recorded $0.2 million for the year ended December 31, 2005. There was no unearned stock compensation expense at December 31, 2007 and 2006.

The following table summarizes employee and director stock option activities for the years ended December 31, 2007, 2006, and 2005. All of the options were issued with an exercise price equal to or greater than the market price of the stock at the time of issue.

	1995
	Plan
	Options			Weighted
	Non-			Average
	Voting			Exercise Price
Balance outstanding at December 31, 2004		206,953		$	11.57
Options exercised		(150,000	)		11.06
Options settled for cash		(10,203	)		8.50
Balance outstanding at December 31, 2005		46,750			13.87
Options exercised		(8,500	)		12.75
Options cancelled		(500	)		12.75
Balance outstanding at December 31, 2006		37,750			14.14
Options exercised		(15,000	)		16.25
Balance outstanding at December 31, 2007		22,750			12.75
Shares exercisable at December 31, 2007		22,750			12.75
December 31, 2006		37,750			13.87
December 31, 2005		46,750			11.57

The following table summarizes information about stock options outstanding as of December 31, 2007. All of the outstanding stock options are exercisable.

Options Outstanding and Exercisable
	Remaining
Number	Contractual	Exercise
Outstanding	Life (Years)	Price
22,750	1.5	$12.75

Incentive Compensation

In 2002, the Company implemented an incentive compensation plan for non-executive and non-represented employees. For calendar year 2007, the represented pilots were added to this plan as part of the Company’s implemented contract proposals. The plan allows the Company to pay up to 8.25% of earnings before tax upon achieving a specified earnings threshold. During 2004, the Company implemented an executive/senior management plan for certain corporate and business unit management employees. Pursuant to these plans, the Company accrued an estimated incentive compensation expense of $3.2 million for 2007. The Company also accrued $0.8 million for the Safety Incentive Bonus for 2007. For the year

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ended December 31, 2006, the Company did not record incentive compensation expense as certain established requirements under the plan were not met. For 2005, the Company recorded $2.3 million of incentive compensation expense related to the above plans.

(7) OTHER ASSETS

The following table summarizes the Company’s other assets at December 31, 2007 and 2006.

	December 31,		December 31,
	2007		2006
	(Thousands of dollars)
Goodwill acquired	$	2,747	$	2,747
Security deposits on aircraft		13,493		10,170
Deferred financing cost		4,468		5,231
Investments		4,089		3,298
Other		2,351		2,370
Total	$	27,148	$	23,816

During 2007 and 2006, the Company placed security deposits on aircraft to be leased or purchased. Upon delivery of the aircraft, the deposits will be applied to the lease or purchase.

(8) FINANCIAL INSTRUMENTS

Fair Value — The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at December 31, 2007 and 2006. The table excludes cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, and term notes payable, all of which had fair values approximating carrying amounts.

	December 31, 2007				December 31, 2006
	Carrying		Estimated		Carrying		Estimated
	Amounts		Fair Value		Amounts		Fair Value
Long-term debt	$	200,000	$	191,000	$	200,000	$	194,000

At December 31, 2007 and 2006, the fair value of long-term debt is based on quoted market indications.

(9) COMMITMENTS AND CONTINGENCIES

Operating Leases — The Company leases certain aircraft, facilities, and equipment used in its operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals and, for certain real estate leases, renewal options. The Company generally pays all insurance, taxes, and maintenance expenses associated with these aircraft and some of these leases contain renewal and purchase options at fair market values. Rental expense incurred under these leases consisted of the following:

	Year Ended		Year Ended		Year Ended
	December 31,		December 31,		December 31,
	2007		2006		2005
	(Thousands of dollars)
Aircraft	$	19,110	$	15,663	$	5,817
Other		6,715		5,174		5,167
Total	$	25,825	$	20,837	$	10,984

In September 2001, the Company began leasing a principal operating facility at Lafayette, Louisiana for twenty years. The lease expires in 2021 and has three five-year renewal options.

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The following table presents the remaining aggregate lease commitments under operating lease having initial non-cancelable terms in excess of one year. The table includes renewal periods on the principal operating facility lease.

	Aircraft		Other		Total
	(Thousands of dollars)
2008	$	18,274	$	3,463	$	21,737
2009		18,274		2,726		21,000
2010		18,876		2,325		21,201
2011		20,144		1,897		22,041
2012		20,811		1,442		22,253
Thereafter		72,771		9,358		82,129
	$	169,150	$	21,211	$	190,361

Purchase Commitments - The Company expects to finance the acquisition of new aircraft, discussed below, with existing cash and cash equivalents, short-term investments, operating leases, the issuance of debt or equity securities or some combination thereof. There are no purchase commitments other than those listed below.

In 2007, the Company took delivery of three transport category aircraft, all of which were financed with an operating lease, ten medium aircraft and twelve light aircraft for service in the Oil and Gas segment. The Company also took delivery of four light aircraft and one fixed wing aircraft for service in the Air Medical segment.

At December 31, 2007, the Company had an order for six additional transport category aircraft, with scheduled delivery dates throughout 2008 and 2009. The approximate cost for these aircraft is $127.4 million.

At December 31, 2007, the Company also had orders for 30 additional aircraft with a total cost of $154.0 million, with scheduled delivery dates throughout 2008 and 2009.

Environmental Matters — The Company has an aggregate estimated liability of $0.2 million as of December 31, 2007 and 2006 for environmental remediation costs that are probable and estimable. The Company has conducted environmental surveys of its former Lafayette Facility, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination. In May 2003, the Company submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination. In April, 2006, the Site Assessment was updated to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, the Company will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. The Company has not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, it believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.

During 2004, LDEQ advised PHI that groundwater contaminants impacting monitor wells at the PHI Lafayette Heliport were originating from an off-site location and that the Company would no longer be required to perform further monitoring at the site. Subsequently, based upon site investigation work performed by the Lafayette Airport Commission, the source of the contamination was identified as residing at another location, for which PHI is not responsible. The Lafayette Airport Commission has begun remediation of the PHI Lafayette Heliport.

Legal Matters — The Company is named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the

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amount of the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

As previously reported, on June 15, 2005, the Company received a subpoena from the United States Department of Justice relating to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the Gulf of Mexico. The Company is cooperating fully with the investigation and believes it has provided all documents and other information required by the subpoena. The Company has not received any further communications from the Department of Justice since shortly after providing the requested information. At this stage, it is not possible to assess the outcome of this investigation, although based on the information available to date, management does not expect the outcome of the investigation to have a material adverse effect on its financial condition, results of operations, or cash flows.

Employee Matters - As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006.

A trial on strike-related matters is currently set to start on November 3, 2008. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management is of the opinion that the Company’s claims and defenses have substantial merit.

(10) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. The Company has used a combination of factors to identify its reportable segments as required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). The overriding determination of the Company’s segments is based on how the chief operating decision-maker of the Company evaluates the Company’s results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work the Company performs. Prior to the change in the Company’s reportable segments described below, the Company had four segments that met the requirements of SFAS 131 for disclosure. The reportable segments were Oil and Gas, Air Medical, International, and Technical Services.

During the quarter ended March 31, 2007, the Company combined the oil and gas customers that were previously included in its International segment into the Company’s Domestic Oil and Gas segment, and eliminated the term “Domestic” from that segment. Additionally, the contract work previously included in the International segment for the National Science Foundation is now included in the Technical Services segment. Therefore there are now three reportable segments: Oil and Gas, Air Medical, and Technical Services. All prior periods have been recast to conform to the 2007 presentation.

The Oil and Gas segment provides helicopter services to oil and gas customers operating in the Gulf of Mexico, Angola, and the Democratic Republic of Congo. The Air Medical segment provides helicopter services to hospitals and medical programs in several U.S. states, and also to individuals under which the Company is paid by either a commercial insurance company, federal or state agency, or the patient. The Company’s Air Evac subsidiary is included in the Air Medical segment. The Technical Services segment provides helicopter repair and overhaul services for existing flight operations customers. The Company also operates four aircraft for the National Science Foundation in Antarctica under the Technical Services segment.

Each segment has a portion of selling, general and administrative expenses that is charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of segment selling, general and administrative expenses. Allocated selling, general and administrative expenses is based primarily on total segment costs as a percentage of total operating costs.

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Air Medical operations are headquartered in Phoenix, AZ, where the Company maintains significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments.

Customers of the Company consist principally of major integrated energy companies and independent exploration and production companies. The customers, individually or considered as a group under common ownership, which accounted for greater than 10% of accounts receivable or 10% of net sales during the periods reflected were as follows:

	Accounts Receivable						Net Sales
	December 31,						Years Ended December 31,
	2007			2006			2007			2006			2005
Customer A		11	%		11	%		15	%		17	%		14	%
Customer B		11	%		7	%		12	%		10	%		9	%

The following table shows information about the profit or loss and assets of each of the Company’s reportable segments for the years ended December 31, 2007, 2006, and 2005. The information contains certain allocations, including allocations of depreciation, rents, insurance, and overhead expenses that the Company deems reasonable and appropriate for the evaluation of results of operations. The Company does not allocate gains on dispositions of property and equipment, other income, interest expense, and corporate selling, general, and administrative expenses to the segments. Where applicable, the tables present the unallocated amounts to reconcile the totals to the Company’s consolidated financial statements. Segment assets are determined by where they are situated at period-end. Corporate assets are principally cash and cash equivalents, short-term investments, other assets, and certain property, and equipment.

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	Year Ended
	December 31,
	2007			2006			2005
	(Thousands of dollars)
Segment operating revenues
Oil and Gas	$	286,118		$	270,707		$	242,464
Air Medical		149,590			133,397			112,123
Technical Services		10,698			9,014			9,023
Total operating revenues		446,406			413,118			363,610
Segment direct expense
Oil and Gas		250,110			228,797			188,872
Air Medical		137,703			130,412			104,465
Technical Services		6,608			7,063			5,926
Total direct expense		394,421			366,272			299,263
Segment selling, general and administrative expenses
Oil and Gas		1,531			1,150			1,181
Air Medical		7,883			7,384			6,503
Technical Services		59			38			43
Total selling, general and administrative expenses		9,473			8,572			7,727
Total direct and selling, general and administrative expenses		403,894			374,844			306,990
Net segment profit (loss)
Oil and Gas		34,477			40,760			52,411
Air Medical		4,004			(4,399	)		1,155
Technical Services		4,031			1,913			3,054
Total		42,512			38,274			56,620
Other, net (1)		40,051			9,946			3,230
Unallocated selling, general and administrative expenses		(20,753	)		(19,267	)		(17,169	)
Interest expense		(16,121	)		(17,243	)		(20,448	)
Loss on debt restructuring		—			(12,790	)		—
Earnings (loss) before income taxes	$	45,689		$	(1,080	)	$	22,233

(1) Including gains on disposition of property and equipment and other income.

	Year Ended
	December 31,
	2007		2006		2005
	(Thousands of dollars)
Expenditures for long lived assets
Oil and Gas	$	130,574	$	107,514	$	56,157
Air Medical		35,053		14,446		39,361
Technical Services		—		518		3
Corporate		971		775		644
Total	$	166,598	$	123,253	$	96,165

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	Year Ended
	December 31,
	2007		2006		2005
	(Thousands of dollars)
Depreciation and Amortization
Oil and Gas	$	17,211	$	17,147	$	16,842
Air Medical		8,303		8,634		6,023
Technical Services		252		235		223
Corporate		4,281		4,281		4,045
Total	$	30,047	$	30,297	$	27,133
Assets
Oil and Gas	$	392,154	$	284,981	$	254,146
Air Medical		184,435		164,234		138,994
Technical Services		7,481		9,984		4,950
Corporate		157,226		241,771		151,119
Total	$	741,296	$	700,970	$	549,209

The following table presents the Company’s revenues from external customers attributed to operations in the United States and foreign areas and long-lived assets in the United States and foreign areas.

	Year Ended
	December 31,
	2007		2006		2005
	(Thousands of dollars)
Operating revenues:
United States	$	424,268	$	387,530	$	335,418
International		22,138		25,588		28,192
Total	$	446,406	$	413,118	$	363,610
Long-Lived Assets:
United States	$	478,795	$	362,527	$	303,924
International		5,324		6,938		7,754
Total	$	484,119	$	369,465	$	311,678

(11) EFFECTS OF HURRICANES

At December 31, 2005, the Company recognized a loss from Hurricane Katrina on August 29, 2005 and Hurricane Rita on September 24, 2005 of approximately $5.6 million consisting of write-off of inventory and other tangible assets of $2.5 million, incremental repair costs and costs to relocate operations from damaged or destroyed bases of $3.1 million. These losses were offset by insurance recoveries of $5.6 million at December 31, 2005, of which $2.7 million was reflected as receivable from the insurance carriers in accounts receivable, other at December 31, 2005. In 2006, the Company incurred additional repair costs and costs related to relocation of operations from damaged or destroyed bases of $3.0 million. This loss was offset by insurance recoveries of $3.0 million in 2006. The Company received proceeds from insurance carriers totaling $8.6 million, of which $2.9 million and $5.7 million was received in 2005 and 2006, respectively.

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(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

The condensed quarterly results of operations for the years ended December 31, 2007 and December 31, 2006 (in thousands of dollars, except per share data) are as follows:

	Quarter Ended
	March 31,		June 30,		September 30,		December 31,
	2007(1)		2007		2007		2007
	(Thousands of dollars, except per share data)
Operating revenues	$	101,753	$	112,975	$	118,401	$	113,277
Gross profit		8,520		15,856		16,974		10,635
Net earnings		663		7,169		8,629		11,757
Net earnings per share
Basic		0.04		0.47		0.56		0.77
Diluted		0.04		0.47		0.56		0.77

	Quarter Ended
	March 31,		June 30,			September 30,		December 31,
	2006		2006(2)			2006(1)		2006(1)
	(Thousands of dollars, except per share data)
Operating revenues	$	101,372	$	107,157		$	109,315	$	95,274
Gross profit		14,317		17,946			16,091		(1,508	)
Net earnings (loss)		2,225		(2,755	)		5,122		(5,259	)
Net earnings (loss) per share
Basic		0.21		(0.19	)		0.34		(0.34	)
Diluted		0.21		(0.19	)		0.33		(0.34	)

(1)	Earnings in the quarters ended September 30, 2006, December 31, 2006, and March 31, 2007, were impacted due to the pilots’ strike that commenced September 20, 2006.
(2)	The loss for the quarter ended June 30, 2006 was a result of the $12.8 million early call premium and associated costs for redemption of the Company’s 9 3/8% Senior Notes recorded in that period.

(13) SHAREHOLDERS’ EQUITY

On April 12, 2006, the Company completed the sale of 4,287,920 non-voting common shares at $35.00 per share and on May 1, 2006, the Company completed the sale of the over-allotment of 578,680 shares also at $35.00 per share. Proceeds from the offering were $160.7 million, net of expenses.

The Company had an average of 15.3 million common shares outstanding for the period ended December 31, 2007, compared to an average of 13.9 million shares for the period ended December 31, 2006. The increase was the result of the equity offerings in April 2006.

(14) CONDENSED FINANCIAL INFORMATION — GUARANTOR ENTITIES

On April 12, 2006, the Company issued $200 million of 7.125% Senior Notes due 2013 and retired $184.8 million of 9 3/8% Series B Senior Notes due 2009. On May 1, 2006, the Company redeemed the remaining $15.2 million 9 3/8% Series B Senior Notes.

The 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of the Company’s Guarantor Subsidiaries.

The following condensed financial information sets forth, on a consolidating basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the Guarantor Subsidiaries. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)

	December 31, 2007
	Parent
	Company		Guarantor
	Only		Subsidiaries(1)		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	1,004	$	421	$	—		$	1,425
Short-term investments		62,970		—		—			62,970
Accounts receivable – net		84,318		13,766		—			98,084
Inventories of spare parts and supplies		55,831		—		—			55,831
Other current assets		11,184		10		—			11,194
Refundable income taxes		525		—		—			525
Total current assets		215,832		14,197		—			230,029
Investment in subsidiaries and others		59,384		—		(59,384	)		—
Intercompany receivable		—		50,729		(50,729	)		—
Other assets		26,878		270		—			27,148
Property and equipment, net		468,070		16,049		—			484,119
Total assets	$	770,164	$	81,245	$	(110,113	)	$	741,296
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,696	$	3,758	$	—		$	28,454
Accrued liabilities		24,942		—		—			24,942
Intercompany payable		50,729		—		(50,729	)		—
Total current liabilities		100,367		3,758		(50,729	)		53,396
Long-term debt		200,000		—		—			200,000
Deferred income taxes and other long-term liabilities		41,128		18,103		—			59,231
Shareholders’ Equity
Paid-in capital		292,564		4,402		(4,402	)		292,564
Accumulated other comprehensive income		61		—		—			61
Retained earnings		136,044		54,982		(54,982	)		136,044
Total shareholders’ equity		428,669		59,384		(59,384	)		428,669
Total liabilities and shareholders’ equity	$	770,164	$	81,245	$	(110,113	)	$	741,296

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

48

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)

	December 31, 2006
	Parent
	Company		Guarantor
	Only		Subsidiaries(1)		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	385	$	435	$	—		$	820
Short-term investments		153,414		—		—			153,414
Accounts receivable – net		75,642		13,652		—			89,294
Inventories of spare parts and supplies		55,596		—		—			55,596
Other current assets		7,922		8		—			7,930
Refundable income taxes		44		591		—			635
Total current assets		293,003		14,686		—			307,689
Investment in subsidiaries and other		46,226		—		(46,226	)		—
Intercompany receivable		—		44,085		(44,085	)		—
Other assets		23,759		57		—			23,816
Property and equipment, net		361,570		7,895		—			369,465
Total assets	$	724,558	$	66,723	$	(90,311	)	$	700,970
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	31,461	$	4,354	$	—		$	35,815
Accrued liabilities		17,487		288		—			17,775
Intercompany payable		44,085		—		(44,085	)		—
Total current liabilities		93,033		4,642		(44,085	)		53,590
Long-term debt		205,500		—		—			205,500
Deferred income taxes and other long-term liabilities		25,900		15,855		—			41,755
Shareholders’ Equity
Paid-in capital		292,222		4,402		(4,402	)		292,222
Accumulated other comprehensive income		77		—		—			77
Retained earnings		107,826		41,824		(41,824	)		107,826
Total shareholders’ equity		400,125		46,226		(46,226	)		400,125
Total liabilities and shareholders’ equity	$	724,558	$	66,723	$	(90,311	)	$	700,970

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

49

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)

	For the year ended December 31, 2007
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
Operating revenues	$	378,092		$	68,314	$	—		$	446,406
Management fees		2,733			—		(2,733	)		—
Gain on dispositions of assets, net		34,953			—		—			34,953
Other		5,090			8		—			5,098
		420,868			68,322		(2,733	)		486,457
Expenses:
Direct expenses		347,397			47,024		—			394,421
Management fees		—			2,733		(2,733	)		—
Selling, general, and administrative		27,140			3,086		—			30,226
Equity in net income of consolidated subsidiaries		(13,158	)		—		13,158			—
Interest expense		16,121			—		—			16,121
		377,500			52,843		10,425			440,768
Earnings before income taxes		43,368			15,479		(13,158	)		45,689
Income taxes		15,150			2,321		—			17,471
Net earnings	$	28,218		$	13,158	$	(13,158	)	$	28,218

	For the year ended December 31, 2006
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
Operating revenues	$	357,355		$	55,763	$	—		$	413,118
Management fees		2,231			—		(2,231	)		—
Gain on dispositions of assets, net		1,910			—		—			1,910
Other		8,016			20		—			8,036
		369,512			55,783		(2,231	)		423,064
Expenses:
Direct expenses		325,115			41,157		—			366,272
Management fees		—			2,231		(2,231	)		—
Selling, general, and administrative		25,106			2,733		—			27,839
Equity in net income of consolidated subsidiaries		(7,592	)		—		7,592			—
Interest expense		17,243			—		—			17,243
Loss on debt restructuring		12,790			—		—			12,790
		372,662			46,121		5,361			424,144
Loss before income taxes		(3,150	)		9,662		(7,592	)		(1,080	)
Income taxes		(2,483	)		2,070		—			(413	)
Net Loss	$	(667	)	$	7,592	$	(7,592	)	$	(667	)

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

50

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)

	For the year ended December 31, 2005
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
Operating revenues	$	310,868		$	52,742	$	—		$	363,610
Management fees		1,485			—		(1,485	)		—
Gain on dispositions of assets, net		1,173			—		—			1,173
Other		1,988			69		—			2,057
		315,514			52,811		(1,485	)		366,840
Expenses:
Direct expenses		263,861			35,402		—			299,263
Management fees		—			1,485		(1,485	)		—
Selling, general, and administrative		22,110			2,786		—			24,896
Equity in net income of consolidated subsidiaries		(8,921	)		—		8,921			—
Interest expense		20,448			—		—			20,448
		297,498			39,673		7,436			344,607
Earnings before income taxes		18,016			13,138		(8,921	)		22,233
Income taxes		3,862			4,217		—			8,079
Net earnings	$	14,154		$	8,921	$	(8,921	)	$	14,154

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

51

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)

	For the year ended December 31, 2007
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)			Eliminations		Consolidated
Net cash provided by operating activities	$	25,224		$	2		$	—	$	25,226
Investing activities:
Purchase of property and equipment		(159,699	)		(16	)				(159,715	)
Proceeds from asset dispositions		58,105			—			—		58,105
Purchase (sale) of short-term investments		90,444			—			—		90,444
Other		(8,298	)		—			—		(8,298	)
Net cash used in investing activities		(19,448	)		(16	)		—		(19,464	)
Financing activities:
Proceeds (payments) line of credit, net		(5,500	)		—			—		(5,500	)
Proceeds from exercise of stock options		343			—			—		343
Net cash used in by financing activities		(5,157	)		—			—		(5,157	)
Increase (decrease) in cash and cash equivalents		619			(14	)		—		605
Cash and cash equivalents, beginning of period		385			435			—		820
Cash and cash equivalents, end of period	$	1,004		$	421		$	—	$	1,425

	For the year ended December 31, 2006
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)			Eliminations		Consolidated
Net cash provided by operating activities	$	30,142		$	182		$	—	$	30,324
Investing activities:
Purchase of property and equipment		(123,047	)		(206	)		—		(123,253	)
Proceeds from asset dispositions		36,809			—			—		36,809
Purchase (sale) of short-term investments		(86,889	)		—			—		(86,889	)
Other		(5,595	)		—			—		(5,595	)
Net cash used in investing activities		(178,722	)		(206	)		—		(178,928	)
Financing activities:
Proceeds of debt issuance – Senior Notes		200,000			—			—		200,000
Premium and costs to retire debt early		(10,208	)		—			—		(10,208	)
Repayment of Senior Notes		(200,000	)		—			—		(200,000	)
Debt issuance costs		(4,857	)		—			—		(4,857	)
Payments on long-term debt		(1,000	)		—			—		(1,000	)
Proceeds from line of credit, net		2,200			—			—		2,200
Proceeds from stock issuance, net		160,722			—			—		160,722
Other		(469	)		—			—		(469	)
Net cash provided by financing activities		146,388			—			—		146,388
Increase in cash and cash equivalents		(2,192	)		(24	)		—		(2,216	)
Cash and cash equivalents, beginning of period		2,577			459			—		3,036
Cash and cash equivalents, end of period	$	385		$	435		$	—	$	820

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

52

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)

	For the year ended December 31, 2005
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)			Eliminations		Consolidated
Net cash provided by operating activities	$	27,864		$	156		$	—	$	28,020
Investing activities:
Purchase of property and equipment		(96,161	)		(4	)				(96,165	)
Proceeds from asset dispositions		10,751			—			—		10,751
Purchase of short-term investments		(52,050	)		—			—		(52,050	)
Net cash used in investing activities		(137,460	)		(4	)		—		(137,464	)
Financing activities:
Payment of long-term debt, net		(5,975	)		—			—		(5,975	)
Proceeds from exercise of stock options		1,025			—			—		1,025
Proceeds from stock issuance, net		113,897			—			—		113,897
Net cash provided by financing activities		108,947			—			—		108,947
(Decrease) Increase in cash and cash cash equivalents		(649	)		152			—		(497	)
Cash and cash equivalents, beginning of period		3,226			307			—		3,533
Cash and cash equivalents, end of period	$	2,577		$	459		$	—	$	3,036

1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

53

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

During the last quarter, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounted principles.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment our management believes that, as of December 31, 2007, our internal control over financial reporting is effective under those criteria.

Deloitte & Touche LLP, our independent registered public accounting firm, has issued a report on the Company’s internal control over financial reporting as of December 31, 2007. This report appears below.

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
PHI, Inc.
Lafayette, Louisiana

We have audited the Internal Control over Financial Reporting of PHI, Inc. and subsidiaries (the “Company”) maintained as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2007 of the Company and our report dated March 11, 2008, expressed an unqualified opinion on those financial statements and financial statement schedule.

DELOITTE & TOUCHE LLP

New Orleans, Louisiana
March 11, 2008

55

ITEM 9.B. OTHER INFORMATION

Not Applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

          Information concerning directors and executive officers required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

          Information required by this item will be included in our definitive information statement in connection with our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.

56

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1.	Financial Statements		Page
	Included in Part II of this report:
		Report of Independent Registered Public Accounting Firm		26
		Consolidated Balance Sheets — December 31, 2007 and December 31, 2006.		27
		Consolidated Statements of Operations for the years ended December 31, 2007, December 31, 2006, and December 31, 2005.		28
		Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, December 31, 2006, and December 31, 2005.		29
		Consolidated Statements of Cash Flows for the years ended December 31, 2007, December 31 2006, and December 31, 2005.		30
		Notes to Consolidated Financial Statements.		31
2.	Financial Statement Schedules
		Schedule II — Valuation and Qualifying accounts for the years ended December 31, 2007, December 31, 2006 and December 31, 2005.		59
3.	Exhibits

3 Articles of Incorporation and By-laws

3.1	(i)	Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1(i) to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2006).
	(ii)	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 8-K filed December 18, 2007).

4	Instruments defining the rights of security holders, including indentures.
4.1	Loan Agreement dated as of April 23, 2002 by and among PHI, Inc., Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.3 to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2002, Commission File No. 0-9827).
4.2	First Amendment to Loan Agreement dated June 18, 2004 by and among PHI, Inc. Acadian Composites, LLC, Air Evac Services, Inc., Evangeline Airmotive Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 10-Q for the quarterly period ended June 30, 2004).
4.3	Second Amendment to Loan Agreement dated September 30, 2005 by and among Petroleum Helicopters, Inc., Air Evac Services, Inc., Evangeline Airmotive, Inc., and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.7 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).
4.4	Third Amendment to Loan Agreement dated April 12, 2006 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 8-K filed on April 13, 2006).
4.5	Fourth Amendment to Loan Agreement dated September 30, 2006 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank Bank (incorporated by reference to Exhibit 4.8 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).

57

4.6	Fifth Amendment to Loan Agreement dated August 1, 2007 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank Bank (incorporated by reference to Exhibit 4.9 to PHI’s Report on Form 10-Q for the quarterly period ended September 30, 2007).
4.7	Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to PHI’s Report on Form 8-K filed on April 13, 2006).
4.8	First Supplemental Indenture dated April 12, 2006, among PHI, Inc., the Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.1 to PHI’s Report on Form 8-K filed on April 13, 2006).
10	Material Contracts
10.1	The Amended and Restated PHI, Inc. 401 (k) Retirement Plan effective January 1, 2007.
10.2	Amended and Restated PHI, Inc. 1995 Incentive Compensation Plan adopted by PHI’s Board effective July 11, 1995 and approved by the shareholders of PHI on September 22, 1995 (incorporated by reference to Exhibit 10.3 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
10.3	Form of Non-Qualified Stock Option Agreement under the PHI, Inc. 1995 Incentive Compensation Plan between PHI and certain of its key employees (incorporated by reference to Exhibit 10.4 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
10.4	Officer Deferred Compensation Plan II adopted by PHI’s Board effective January 1, 2005 (incorporated by reference to Exhibit 10.5 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
10.5	Articles of Agreement Between PHI, Inc. & Office & Professional Employees International Union and its Local 108 dated June 13, 2001 (incorporated by reference to Exhibit 10.6 to PHI’s Report on Form 10-K for the year ended December 31, 2006).
21	Subsidiaries of the Registrant
23.1	Consent of Deloitte & Touche LLP
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chief Executive Officer.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chief Executive Officer.
32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.

58

PHI, INC. AND SUBSIDIARIES
Schedule II — Valuation and Qualifying Accounts
(Thousands of dollars)

			Additions
	Balance at		Charged to					Balance at
	Beginning		Costs and					End
Description	of Year		Expenses			Deductions		of Year
Year ended December 31, 2007:
Allowance for doubtful accounts	$	50	$	—		$	—	$	50
Allowance for obsolescent inventory		7,256		843			639		7,460
Allowance for contractual discounts		29,930		130,753			128,825		31,858
Allowance for uncompensated care		20,099		42,190			43,159		19,130
Year ended December 31, 2006:
Allowance for doubtful accounts	$	163	$	—		$	113	$	50
Allowance for obsolescent inventory		6,268		1,502			514		7,256
Allowance for contractual discounts		24,091		97,226			91,387		29,930
Allowance for uncompensated care		11,597		40,073			31,571		20,099
Year ended December 31, 2005:
Allowance for doubtful accounts	$	163	$	—		$	—	$	163
Allowance for obsolescent inventory		6,988		(70	)		650		6,268
Allowance for contractual discounts		12,871		77,672			66,452		24,091
Allowance for uncompensated care		7,424		26,796			22,623		11,597

59

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PHI, INC.
By:	/s/ Michael J. McCann
	Michael J. McCann
	Chief Financial Officer (Principal Financial and Accounting Officer)

     Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Al A. Gonsoulin Al A. Gonsoulin	Chairman of the Board Chief Executive Officer and Director (Principal Executive Officer)	March 11, 2008
/s/ Lance F. Bospflug	Director	March 11, 2008
Lance F. Bospflug
/s/ Arthur J. Breault, Jr.	Director	March 11, 2008
Arthur J. Breault, Jr.
/s/ Thomas H. Murphy	Director	March 11, 2008
Thomas H. Murphy
/s/ Richard H. Matzke	Director	March 11, 2008
Richard H. Matzke
/s/ C. Russell Luigs C. Russell Luigs	Director	March 11, 2008
/s/ Michael J. McCann Michael J. McCann A	Chief Financial Officer (Principal Financial and Accounting Officer)	March 11, 2008

60

EX-10.1

EXHIBIT 10.1

PHI, INC.

401(k) RETIREMENT PLAN

Amendment and Restatement

Effective January 1, 2007

TABLE OF CONTENTS

INTRODUCTION			1
ARTICLE 1. DEFINITIONS			2
	1.1.	Account Balance or Account	2
	1.2.	Affiliate	2
	1.3.	Beneficiary	2
	1.4.	Board of Directors or Board	2
	1.5.	Catch-Up Contributions	2
	1.6.	Code	2
	1.7.	Company	2
	1.8.	Compensation	2
	1.9.	Disabled	4
	1.10.	Effective Date	4
	1.11.	Eligible Employee	4
	1.12.	Employee	4
	1.13.	Employee Benefits Committee or Committee	5
	1.14.	Employer	5
	1.15.	Employer Account	5
	1.16.	Employment Commencement Date	5
	1.17.	Entry Date	5
	1.18.	ERISA	5
	1.19.	401(k) Account	5
	1.20.	401(k) Contributions	5
	1.21.	Highly Compensated Employee	5
	1.22.	Hour of Service	6
	1.23.	Investment Fund	6
	1.24.	Limitation Year	7
	1.25.	Matching Account	7
	1.26.	Matching Contributions	7
	1.27.	Nonelective Contribution Account	7
	1.28.	Nonhighly Compensated Employee	7
	1.29.	Normal Retirement Age	7

	1.30.	Normal Retirement Date	7
	1.31.	One Year Period of Severance	7
	1.32.	Participant	7
	1.33.	Plan	7
	1.34.	Plan Year	7
	1.35.	Predecessor Company	7
	1.36.	Prior Plan	7
	1.37.	Qualified Domestic Relations Order	7
	1.38.	Qualified Matching Contributions	8
	1.39.	Qualified Nonelective Contributions	8
	1.40.	Rollover Account	8
	1.41.	Rollover Contribution	8
	1.42.	Service	8
	1.43.	Severance of Service	8
	1.44.	Spouse or Surviving Spouse	9
	1.45.	Trust	9
	1.46.	Trustee	9
	1.47.	Valuation Date	10
	1.48.	Year of Service	10
ARTICLE 2. ELIGIBILITY AND PARTICIPATION			11
	2.1.	Initial Participation	11
	2.2.	Change in Status	11
	2.3.	Participation upon Reemployment	11
	2.4.	Ineligible Employees	11
ARTICLE 3. CONTRIBUTIONS			12
	3.1.	Employee Contributions	12
	3.2.	Company Contributions	13
	3.3.	Makeup Contributions	13
	3.4.	401(k) Plan Nondiscrimination Testing	13
	3.5.	Rollover Contributions	14
	3.6.	Method and Time for Payment of Contributions	14
	3.7.	Contribution Due to Mistake of Fact	14

ii

	3.8.	Nondeductible Overpayment	14
	3.9.	Individual Accounting	14
ARTICLE 4. CONTRIBUTION ALLOCATIONS AND VESTING			15
	4.1.	Allocation of Employee Contributions	15
	4.2.	Company Contributions	15
	4.3.	Limitation on Annual Addition	16
	4.4.	Vesting	17
	4.5.	Forfeitures	17
ARTICLE 5. VALUATION OF FUND AND ALLOCATION OF GAINS AND LOSSES			19
	5.1.	Valuation of Fund	19
	5.2.	Daily Valuation	19
ARTICLE 6. PAYMENT OF BENEFITS			20
	6.1.	Distribution of Benefits	20
	6.2.	Amount, Time and Method of Payment	20
	6.3.	Small Benefit Payments	20
	6.4.	Minimum Distribution Rules	21
	6.5.	Election of Direct Rollover	21
	6.6.	Definitions	21
	6.7.	Qualified Domestic Relations Order Payments	22
	6.8.	Reemployment	22
ARTICLE 7. DEATH BENEFITS			23
	7.1.	Death Benefits	23
	7.2.	Designation of Beneficiary	23
	7.3.	Time and Method of Payment	23
ARTICLE 8. IN-SERVICE WITHDRAWALS BY PARTICIPANTS			25
	8.1.	Hardship Withdrawals from 401(k) Account	25
	8.2.	Withdrawal from Rollover Account	26
	8.3.	Withdrawals after Age 591/2	26
	8.4.	Limitations on Withdrawals	26
	8.5.	Automated Withdrawals	26

iii

	8.6.	Special Rules for Qualified Hurricane Distributions	26
ARTICLE 9. INVESTMENT OF TRUST ASSETS — PARTICIPANT DIRECTED INVESTMENTS			28
	9.1.	Participant Directed Investments	28
	9.2.	Voting Rights	28
ARTICLE 10. PLAN ADMINISTRATION			29
	10.1.	Establishment of the Employee Benefits Committee	29
	10.2.	Powers of the Employee Benefits Committee	29
	10.3.	Duties and Authority of the Employee Benefits Committee	30
	10.4.	Actions by the Committee or a Subcommittee	30
	10.5.	Indemnification	31
	10.6.	Benefit Application and Claims Procedure	31
	10.7.	Responsibilities of Named Fiduciaries Other than the Committee	32
	10.8.	Allocation of Responsibilities	32
	10.9.	Designation of Persons to Carry Out Responsibilities of Named Fiduciaries	33
	10.10.	Payment of Expenses	33
ARTICLE 11. PLAN ADOPTION, AMENDMENT OR TERMINATION			34
	11.1.	Amendment of Plan	34
	11.2.	Merger	34
	11.3.	Form of Amendments	34
	11.4.	Acceptance of Transferred Assets	34
	11.5.	Plan to Plan Transfers	34
	11.6.	Plan Termination or Partial Termination	35
ARTICLE 12. TRUST FUND AND THE TRUSTEE			36
	12.1.	Trust and Trustee	36
	12.2.	Assets of the Trust	36
ARTICLE 13. MISCELLANEOUS			37
	13.1.	Limitation of Assignment	37
	13.2.	Legally Incompetent Distributee	37
	13.3.	Unclaimed Payments	37

iv

	13.4.	Notification of Addresses	37
	13.5.	Notice of Proceedings and Effect of Judgment	37
	13.6.	Severability	37
	13.7.	Limitation of Rights	38
	13.8.	Controlling Law	38
	13.9.	Errors in Payment	38
	13.10.	USERRA and Code Section 414(u) Compliance	38
	13.11.	Loans	38
	13.12.	Headings and Use of Words	39
ARTICLE 14. TOP-HEAVY PROVISIONS			40
	14.1.	Applicability of this Article	40
	14.2.	Top-Heavy and Super Top-Heavy Determination	40
	14.3.	Computation of the Aggregate of the Account Balances	40
	14.4.	Required Aggregation of Plans	41
	14.5.	Permissive Aggregation of Plans	42
	14.6.	Special Rules of Top-Heavy Plans and Super Top-Heavy Plans	42
	14.7.	Special Definitions	43
ARTICLE 15. MINIMUM DISTRIBUTION REQUIREMENTS			44
	15.1.	General Rules	44
	15.2.	Time and Manner of Distribution	44
	15.3.	Required Minimum Distributions During Participant’s Lifetime	45
	15.4.	Required Minimum Distributions After Participant’s Death	46
	15.5.	Definitions	47
SCHEDULE A 401(k) PLAN NONDISCRIMINATION TESTING			A — 49
	A.1	ADP Test	A — 49
	A.2	ACP Test	A — 55
	A.3	Excess 401(k) Deferrals	A — 60
	A.4	Forfeitures	A — 61
SCHEDULE B ELIGIBLE UNION EMPLOYEES			B — 1
SCHEDULE C PARTICIPATING AFFILIATES			C — 1

v

INTRODUCTION

          The PHI, Inc. 401(k) Retirement Plan was originally effective as of July 1, 1989. It has been amended from time to time and is hereby amended and restated in its entirety. The Plan is intended to qualify as a profit sharing plan under Section 401(a) of the Code, and includes a cash or deferred arrangement that is intended to qualify under Section 401(k) of the Code. The Plan is maintained for the exclusive benefit of eligible employees and their beneficiaries. The Plan is effective January 1, 2007, except where a different effective date applicable to a provision is specified, in which case, the different effective date shall be deemed the effective date of that provision in operating the Plan, even if it relates to a date earlier than the effective date of this amendment and restatement.

ARTICLE 1.
DEFINITIONS

          Whenever the following capitalized terms are used in a Plan, they have the meanings specified below. Other words and phrases may be used which are not defined in this Article 1, but for convenience, are defined when introduced in the text.

1.1.	Account Balance or Account means the total amount credited to a Participant’s 401(k) Account, Matching Account, Nonelective Contribution Account, Employer Account, and Rollover Account. Where the balance in a Participant’s Account is to be determined as of a given Valuation Date, such balance shall be determined after all adjustments and allocations for the Valuation Date have been made.
1.2.	Affiliate means (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) with the Employer, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with the Employer, (c) any other corporation, partnership, or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with the Employer, or (d) any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o).
1.3.	Beneficiary means the person, persons, or entity designated by the Participant under the terms of the Plan to receive any death benefit that becomes payable under the Plan.
1.4.	Board of Directors or Board means the (a) Board of Directors or other governing body of the Employer or (b) person acting with proper authority from the Board.
1.5.	Catch-Up Contributions mean elective deferrals by a Participant who has attained age 50 before the close of the Plan Year, made in accordance with and subject to the limitations of Code Section 414(v).
1.6.	Code means the federal Internal Revenue Code of 1986, as amended.
1.7.	Company means the Employer and any Affiliate (or the successor of an Affiliate) listed on Schedule C that maintains the Plan with the consent of the Employee Benefits Committee.
1.8.	Compensation

(a) General Definition. Compensation means for a calendar year the amount paid to a Participant by a Company during the year for wages, salaries, and other amounts received in the course of employment with the Company to the extent that the amounts are includible in gross income (including, but not limited to commissions paid to salesmen, compensation for services on the basis of a percentage of profits, bonuses, incentive payments, overtime pay and shift differential). For all purposes under the Plan, Compensation shall include any amount contributed by a Company on behalf of a Participant pursuant to a salary

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reduction agreement which is not includible in the gross income of the Participant under Code Section 125, 132(f)(4), 401(k), 402(e)(3) or 402(h).

	For purposes of this definition, Compensation does not include severance pay, stock options, reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation, welfare benefits (whether or not includible in gross income) and income from property subject to Code Section 83. Payments made within 21/2 months after severance from employment (within the meaning of Code Section 401(k)(2)(B)(i)(l)) will be Compensation if they are payments that, absent a severance from employment, would have been paid to the Employee while the Employee continued in employment with the Employer and are regular compensation for services during the Employee’s regular working hours, compensation for service outside the Employee’s regular working hours (such as overtime or shift differentials), commissions, bonuses, or other similar compensation, but only if the Employee would have been able to use the leave if employment had continued. Any payments not described above are not considered Compensation if paid after severance from employment, even if they are paid within 21/2 months following severance from employment, except payments to an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code Section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service.
(b)	For Plan Years beginning in 2007 and thereafter, Compensation shall be limited to $225,000 annually and shall be adjusted for changes in the cost of living in accordance with Code Section 401(a)(17)(B). For Plan Years of less than 12 months, this limit shall be prorated based on the number of calendar months in the short Plan Year.
(c)	Definition for Purposes of 401(k) Contributions. Notwithstanding (a) above, for purposes of determining an Employee’s 401(k) Contributions, Compensation shall exclude commissions, vacation purchases and other extra or special compensation, such as, but not limited to, safety awards, one-time relocation bonuses, incentive bonuses, and severance pay (including cash-out of vacation pay, both banked and current). Effective January 1, 2002, Compensation shall include cash payments of banked vacation pay paid while actively employed and incentive bonuses paid for the 2002 fiscal year and years thereafter.
(d)	Definition for Purposes of Matching Contributions. Notwithstanding (a) above, for purposes of determining Matching Contributions, Compensation shall exclude bonuses, commissions, overtime pay, vacation purchases, and other extra or special compensation such as, but not limited to, safety awards, one-time relocation bonuses, incentive bonuses, and severance pay (including cash-out of vacation pay, both banked and current). Effective January 1, 2002 Compensation shall include banked vacation pay paid while actively employed

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and incentive bonuses paid on account of the 2002 fiscal year and years thereafter.

1.9.	Disabled means that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The permanence and degree of such impairment shall be supported by a statement from a medical doctor licensed and practicing in the United States.
1.10.	Effective Date means January 1, 2007, except to the extent a different effective date is set forth for a specific section in this Plan.
1.11.	Eligible Employee means any Employee actively providing services to a Company or on an authorized leave of absence, other than an Employee who is:

(a)	covered by a collective bargaining agreement between a union and a Company, provided that retirement benefits were the subject of good faith bargaining, unless (i) the bargaining agreement specifically provides for participation in this Plan, or (ii) the bargaining agreement specifically provides for participation in a tax-qualified plan of a company acquired by the Employer or an Affiliate and the Employee Benefits Committee has consented to participation in this Plan, which consent is evidenced by specifying the bargaining agreement in Schedule B,
(b)	a leased employee, or
(c)	a non-resident alien.

1.12.	Employee means any person, including an officer, who is on the payroll of the Company and whose wages are subject to withholding for purposes of federal income taxes or for purposes of the Federal Insurance Contribution Act. A person treated as an independent contractor shall not be treated as an Employee for purposes of the Plan without regard to whether such person is a common law employee of the Company or is retroactively recharacterized as an employee of the Company for wage tax purposes.
	A person providing services to the Company whose employer for payroll purposes is an unrelated third party shall not be treated as an Employee for purposes of the Plan, without regard to whether such person is a common law employee of the Company or is retroactively recharacterized as an employee of the Company for wage tax purposes.
	The term “leased employee” means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person (“leasing organization”) has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Internal Revenue Code) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control of the recipient. A leased employee shall be treated as an employee of the Company, but only for purposes of coverage testing under 410(b). Contributions or benefits provided a leased employee by

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the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer.

A leased employee shall not be considered an employee of the recipient if:

(a) such employee is covered by a money purchase pension plan providing:

(i)	a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee’s gross income under Section 125, 132(f)(4), Section 402(e)(3), Section 402(h)(1)(B) or Section 403(b) of the Code,
(ii)	immediate participation, and
(iii)	full and immediate vesting; and

(b) leased employees do not constitute more than 20 percent of the recipient’s nonhighly compensated work force.

1.13.	Employee Benefits Committee or Committee means the Employee Benefits Committee established in Article 10 of this Plan which shall consist of not less than three nor more than seven persons appointed from time to time by the Board of Directors to serve as Plan Administrator.
1.14.	Employer means PHI, Inc. and any successor thereto.
1.15.	Employer Account means the account maintained for a Participant which is credited with employer Discretionary Contributions made pursuant to Section 3.2(c).
1.16.	Employment Commencement Date means the date on which an Employee first performs an Hour of Service for a Company.
1.17.	Entry Date means the first day of each calendar month.
1.18.	ERISA means the Employee Retirement Income Security Act of 1974, as amended.
1.19.	401(k) Account means the account maintained for a Participant which is credited with the Participant’s 401(k) Contributions.
1.20.	401(k) Contributions mean the elective deferrals made pursuant to a Participant’s election which have been contributed in accordance with Code Section 401(k).
1.21.	Highly Compensated Employee means an Employee who:

(a) is a 5-percent owner at any time during the year or the preceding year; or

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(b)	received compensation during the preceding year from the Company in excess of $100,000 (as adjusted pursuant to Code Section 415(d)),
	A former Employee shall be treated as a Highly Compensated Employee if such employee was a Highly Compensated Employee when such employee separated from service or such employee was a Highly Compensated Employee at any time after attaining age 55.
	The determination of who is a Highly Compensated Employee will be made in accordance with Code Section 414(q) and the regulations thereunder.

1.22. Hour of Service means:

(a)	Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Company. These hours shall be credited to the Employee for the computation period or periods in which the duties are performed;
(b)	Each hour for which an Employee is paid, or entitled to payment, by a Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, or leave of absence. Such person shall not be considered to have terminated employment under this Section 1.22(b) unless the person fails to return to the employ of the Company at or prior to the expiration date of the person’s absence hereunder, in which case the person shall be deemed to have terminated employment as of the date of commencement of such absence;
(c)	Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Company. These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made.

	An Hour of Service credited under Section 1.22(a) or (b) above will not be credited under Section 1.22(c).
	Hours under this section shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor regulations which are incorporated herein by reference.
	An Hour of Service with an Affiliate that has not adopted the Plan is treated as an Hour of Service with a Company for vesting purposes and for purposes of meeting the eligibility service requirement.
1.23.	Investment Fund means any of the funds in which a Participant may invest his or her Account in accordance with the provisions of Article 9.

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1.24.	Limitation Year means the calendar year.
1.25.	Matching Account means the account maintained for a Participant which is credited with Matching Contributions and/or discretionary matching contributions made pursuant to Section 3.2.
1.26.	Matching Contributions mean the contributions made by a Company which match a Participant’s 401(k) Contributions.
1.27.	Nonelective Contribution Account means the account maintained for a Participant which is credited with Qualified Nonelective Contributions or Qualified Matching Contributions made on behalf of a Participant.
1.28.	Nonhighly Compensated Employee means an Employee who is not a Highly Compensated Employee.
1.29.	Normal Retirement Age means age 65 with five Years of Service.
1.30.	Normal Retirement Date means the date a Participant attains Normal Retirement Age.
1.31.	One Year Period of Severance means a 12-consecutive month period beginning on the date a Severance of Service occurs and ending on the first anniversary of such date, provided that the Employee during the 12-consecutive month period fails to perform an Hour of Service.
1.32.	Participant means any person who has an Account Balance in the Plan. Notwithstanding the foregoing, an Eligible Employee who elects not to contribute to the Plan, shall be treated as a Participant for purposes of Article 14 and Schedule A.)
1.33.	Plan means the PHI, Inc. 401(k) Retirement Plan.
1.34.	Plan Year means the calendar year.
1.35.	Predecessor Company means a company or other business entity acquired by the Employer or an Affiliate whose service was counted under the Prior Plan.
1.36.	Prior Plan means the tax-qualified retirement plan of a Company that is restated hereunder, if any.
1.37.	Qualified Domestic Relations Order means a judgment, decree, or order relating to the provision of child support, alimony payments, or marital property rights, to a spouse, former spouse, child or other dependent, made pursuant to a state domestic relations law, which creates or recognizes the existence of an alternate payee’s right to receive all or a portion of the benefits payable with respect to a Participant under the Plan, as described in Code Section 414(p).

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1.38.	Qualified Matching Contributions mean the contributions made to comply with Code Section 401(k) or (m) and allocated to a Participant’s Nonelective Contribution Account.
1.39.	Qualified Nonelective Contributions mean the contributions made to comply with Code Section 401(k) or (m) and allocated to a Participant’s Nonelective Contribution Account.
1.40.	Rollover Account means the account maintained for a Participant which is credited with a Rollover Contribution.
1.41.	Rollover Contribution means a direct rollover of an Eligible Rollover Distribution amount by a Participant or the amount transferred from an Eligible Retirement Plan and allocated to a Participant’s Rollover Account.
1.42.	Service means a period commencing on the Employee’s Employment Commencement Date or reemployment commencement date, whichever is applicable, and ending on the Employee’s Severance of Service, subject to the following:

(a)

If an Employee has a Severance of Service because of a quit, discharge or retirement and then performs an Hour of Service within twelve (12) months of the Severance of Service date, he or she shall receive Service credit for the period of time commencing on the date a Severance of Service occurs and ending on the date on which the Employee again performs an Hour of Service for the Employer or an Affiliate. (hereafter referred to as “Period of Severance”).

(b)

An Employee who has a Severance of Service because of a quit, discharge or retirement during or immediately following an authorized leave of absence, and who performs an Hour of Service within (12) months from the date the leave of absence began, shall receive service credit for the Period of Severance. If an Employee is absent for 12 full months, no service credit is given for the Period of Severance, except as required by Section 13.10.

	In determining an Employee’s Service, a prior period of service not required to be taken into account by reason of a period of severance which constitutes a One Year Period of Severance shall not be recognized under the Plan. If an Employee incurs more than a One Year Period of Severance but less than five consecutive One Year Periods of Severance, all Years of Service credited before the period of severance shall be reinstated.
	Service with a Predecessor Company shall be taken into account under the Plan as Service with a Company only with respect to an Employee who was employed by the Predecessor Company on the date its assets or stock were acquired by the Employer or an Affiliate. Service with a Predecessor Company shall be taken into account under the Plan unless previously disregarded under the Plan or the Prior Plan.
1.43.	Severance of Service means the earlier of:

(a) the date on which the Employee quits, retires, is discharged or dies;

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(b)	the date on which the Employee fails to return to the service of the Company at the expiration of an authorized leave of absence in excess of twelve (12) months or recovery from being Totally and Permanently Disabled in excess of six (6) months; or
(c)	the first anniversary of the first date of a period in which the Employee remains absent from service with the Company (with or without pay) for any reason other than quit, retirement, discharge, death, authorized leave of absence or Total and Permanent Disability (such as vacation, holiday, sickness, unauthorized leave of absence or layoff).

Severance of Service shall not occur and credit for vesting purposes shall be given for the following:

(d)	a period of service with the Armed Forces of the United States of America, if an Employee who left active service with the Company to enter and did directly enter such Armed Forces, returned to active employment within the time and under the conditions which entitle him/her to reemployment rights under the laws of the United States of America;
(e)	transfer directly from the employment of one Company to another Company. Transfer of an Employee in this Plan to service with an Affiliate which has not adopted this Plan will not be considered a Severance of Service and will cause such service to be included as Service in this Plan. However, such aforesaid service will only be credited for vesting purposes and not for benefit purposes under this Plan; or
(f)	the period ending on the second anniversary of any absence from work by reason of the pregnancy of the Employee, by reason of the birth of a child of the Employee, by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee, or for purposes of caring for such child for a period immediately following such birth or placement; provided, however, that the period between the first and second anniversaries of the first day of any such absence shall not count as Service and no credit will be given for such period for vesting purposes.

1.44.	Spouse or Surviving Spouse means the legal spouse of the Participant, provided that a former spouse will be treated as the Spouse or Surviving Spouse to the extent provided under a Qualified Domestic Relations Order, except that none of the requirements relating to consent shall apply to such former spouse.
1.45.	Trust means the assets of the Plan held by the Trustee(s), segregated in a separate trust or trusts and governed by a separate trust document or documents. This document may govern multiple trusts.
1.46.	Trustee means the person, persons, bank, and/or other entity selected by the Board to hold the assets of a Trust in accordance with Article 12.

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1.47.	Valuation Date means each business day of the Plan Year that the Trust assets are valued or such Valuation Dates as may be specified by the Employer, but no less frequently than the last day of the Plan Year.
1.48.	Year of Service means twelve months of Service with the Employer or an Affiliate. Years of Service shall not include employment otherwise disregarded under the Plan or Prior Plan.
	All non-successive periods of Service shall be aggregated and any periods of Service of less than a whole year (whether or not consecutive) shall be aggregated on the basis that twelve months of Service equal a whole Year of Service. A month of Service is deemed to be 30 days in the case of the aggregation of fractional months. After aggregating all Service, any period of Service less than a whole year (12 months) shall be disregarded.
	If a Participant incurs a Severance of Service that is more than six months after his most recent Anniversary Date, the Participant shall be considered to have completed a Year of Service during the Computation Period starting on such Anniversary Date for vesting purposes.
	If, under the terms of the Prior Plan, service was credited using the general method described in ERISA Reg. § 2530.200b-2, an Employee’s Service shall be converted to the elapsed time method by crediting each Employee with a period of Service consisting of :

(a)	A number of years equal to the number of years of service credited to the Employee under the terms of the Prior Plan before the Plan Year in which the Prior Plan was amended and restated; and
(b)	The greater of:

(i)	the period of Service that would be credited to the Employee under the Service provisions of the this Plan beginning on the first day of the Plan Year in which the Plan is amended and restated; or
(ii)	the service taken into account under the Prior Plan for the year of the amendment as of the date the Prior Plan is amended and restated.

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ARTICLE 2.
ELIGIBILITY AND PARTICIPATION

2.1.	Initial Participation. An Eligible Employee may become a Participant as of the Entry Date coinciding with or next following the date on which he first performs one Hour of Service.
2.2.	Change in Status.

(a)

If a Participant no longer meets the definition of an Eligible Employee, such Participant may no longer contribute to the Plan and is no longer eligible for Company contributions effective as of the time of such change in status. If any such Employee again becomes an Eligible Employee, active participation in the Plan commences effective as of the time of the change in status. A change in status includes, but is not limited to, transfer to or from an Affiliate which is not participating in this Plan or becoming a member of a collective bargaining unit whose members do not participate in the Plan.

(b)

If an Employee is employed by a Company after working for an Affiliate not covered by the Plan, his Service with the Affiliate shall count for purposes of meeting the eligibility requirement of Section 2.1, except that if his employment with the Affiliate terminated and he is reemployed by a Company after more than five consecutive One Year Periods of Severance, prior Service is disregarded.

2.3.

Participation upon Reemployment. Generally, if an Employee who terminates employment is reemployed before he incurs a One Year Period of Severance, he shall participate immediately upon reemployment provided the Participant is an Eligible Employee at the time of reemployment. If a Participant has no vested interest in his Matching Account and Employer Account and incurs more than five consecutive One Year Periods of Severance, prior Service shall be disregarded for purposes of meeting the eligibility requirement of Section 2.1. If a Participant who terminates employment has a vested interest in his Matching Account and Employer Account and is later reemployed, all service shall count.

2.4.

Ineligible Employees. In the event that a Nonhighly Compensated Employee is not an Eligible Employee, but is erroneously allowed to participate in the Plan, he or she is deemed eligible to participate during the period for which contributions are made to the Plan. The Company is not obligated to make a Matching Contribution with respect to any such erroneous contribution, but may do so, in its sole discretion.

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ARTICLE 3.
CONTRIBUTIONS

3.1. Employee Contributions.

(a) 401(k) Contributions.

(i)	Participant Election. A Participant may elect to make 401(k) Contributions in whole percentages of Compensation not to exceed the lesser of: 90% of Compensation, or $15,500 (the Code Section 402(g) limit in effect for the 2007 taxable year), adjusted from time to time for increases in the cost-of-living pursuant to Code Section 402(g)(5).
(ii)	Separate Election for Bonuses and Accrued Vacation. Notwithstanding the preceding, a Participant may make a separate deferral election with respect to bonuses and accrued vacation payments made in lieu of time off, in a percentage from 1% to 100%, subject to the Code Section 402(g) limit in effect for the applicable Plan Year.
(iii)	Automatic Enrollment. An Employee hired on or after April 1, 2006, will be automatically enrolled in the Plan with an election equal to 3% of Compensation on the first date he is otherwise eligible to participate in the Plan if he does not make an affirmative election under paragraph (i) above. Such deemed deferral election shall remain in effect until changed by the Participant in accordance with the terms of Section 3.1(c) of the Plan. Each Employee will be given a reasonable amount of time before the first applicable payroll period, to cancel his/her automatic enrollment instead of having the automatic 401(k) deferral election applied to his/her pay.

(b)	Catch-Up Contributions. Catch-Up Contributions are 401(k) Contributions made to the Plan that are in excess of an otherwise applicable Plan limit and that are made by a Participant who is at least age 50 at any time during the Plan Year. An otherwise applicable Plan limit is a limit in the Plan that applies to 401(k) Contributions without regard to Catch-Up Contributions, such as the limits on annual additions, the dollar limitation on 401(k) Contributions under Code Section 402(g) (not taking into account Catch-Up Contributions) and the limit imposed by the actual deferral percentage (ADP) test under Code Section 401(k)(3).
	A Participant may elect to make Catch-Up Contributions for a taxable year not to exceed the lesser of (i) the dollar limit on Catch-Up Contributions under Code Section 414(v)(2)(B)(i) for the taxable year, or (ii) 90% of the Participant’s Compensation for the Plan Year when added to other 401(k) Contributions. The dollar limit on Catch-Up Contributions is $5,000 (adjusted from time to time for increases in the cost-of-living pursuant to Code Section 414(v)(2)(C)).
	Catch-Up Contributions are not subject to the limits on annual additions, are not counted in the ADP test and are not counted in determining the minimum

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allocation under Code Section 416, but Catch-Up Contributions made in prior years are counted in determining whether the Plan is top-heavy.

(c) Participant’s Election. A Participant may make or change the contribution election made pursuant to this Section 3.1 at any time in accordance with the Plan’s administrative procedures.

3.2. Company Contributions.

(a)	Matching Contributions. The Company shall make Matching Contributions on behalf of each Participant who is an Eligible Employee in an amount equal to 200% of the amount contributed for said Participant under Section 3.1(a); however, no more than 3% of the Participant’s Compensation shall be taken into account. The Matching Contribution shall be made taking into account Compensation on a payroll period basis. The annual Matching Contribution under this section shall equal two times the Participant’s 401(k) Contribution, not to exceed 6% of the Participant’s Compensation. The Matching Contribution shall be made taking into account Compensation on a payroll period basis with respect to regular payroll checks and on the basis of each payment made with respect to incentive bonuses and cash payment of banked vacation pay paid while actively employed.
(b)	Discretionary Matching Contributions. The Company, in its sole discretion, may make discretionary matching contributions to the Plan to match Participant’s 401(k) Contributions.
(c)	Discretionary Contributions. The Company, in its sole discretion, may make a profit sharing contribution to the Plan for a Plan Year, without regard to whether the Company has profits.
(d)	Qualified Nonelective Contributions and Qualified Matching Contributions. The Company may make Qualified Nonelective Contributions and/or Qualified Matching Contributions to satisfy the nondiscrimination tests described in Schedule A of the Plan. The Employer shall not be required to make a Qualified Nonelective Contribution or a Qualified Matching Contribution for any Plan Year, and the Employer shall have sole discretion to determine whether any such contribution shall be made for a Plan Year and the amount of such contribution.

3.3.

Makeup Contributions. The Company may make special makeup contributions to the Plan, if necessary. A makeup contribution is necessary if a Participant’s or Beneficiary’s Account must be reinstated in accordance with Section 6.8 or if a mistake or omission in making or allocating contributions is discovered and is not corrected by revising prior allocations. A makeup contribution may be made if it is determined that a correction is advisable under an IRS voluntary compliance procedure.

3.4.

401(k) Plan Nondiscrimination Testing. The Plan will satisfy the nondiscrimination tests set out in Schedule A.

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3.5.	Rollover Contributions. An Eligible Employee may transfer to the Plan and Trust all or any portion of the money or other property received by the Employee from an Eligible Retirement Plan that constitutes an Eligible Rollover Distribution under Code Section 402(c), excluding any portion of such distribution representing after-tax employee contributions. Any such rollover must be completed within sixty (60) days of the Employee’s receipt of the qualifying rollover distribution.
	The Rollover Contribution must meet all applicable rollover or plan to plan transfer requirements under the Code. Acceptance by the Plan and Trust of any rollover or direct transfer shall not constitute, or be construed to be, a determination by the Committee of the tax consequences to the Participant of the rollover or direct transfer.
3.6.	Method and Time for Payment of Contributions.

(a)	It is the intent of the Company to pay 401(k) Contributions and Participant loan repayments to the Trust in accordance with Department of Labor regulations.
(b)	All other contributions shall be paid to the Trust no later than the time prescribed by law (including extensions thereof) for filing the Company’s federal income tax return for the fiscal year ending with or within the Plan Year for which the contribution is made.

3.7.	Contribution Due to Mistake of Fact. If a contribution was made due to a mistake of fact, the amount attributable to the mistake of fact (unadjusted for earnings attributable to the mistaken amount, but reduced for any losses attributable to the mistaken amount) may revert to the Company within a one year period after it was contributed. If such reversion does not occur within such one year period, such mistaken amount shall be held in a suspense account and used as Company contributions in accordance with the Company’s direction.
3.8.	Nondeductible Overpayment. All contributions to the Plan are conditioned on their deductibility under Code Section 404. If a nondeductible overpayment is made by the Company, such overpayment may revert to the Company within a one year period, unadjusted for earnings attributable to the overpayment, but reduced for any losses attributable to the overpayment. If a nondeductible overpayment does not revert within such one year period, such overpayment shall be held in a suspense account (with no adjustment for gains, losses or interest), and used as a Company contribution in accordance with the Company’s direction.
3.9.	Individual Accounting. The Committee shall establish and maintain adequate records disclosing the separate proportionate interest of each Participant in a Trust.

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ARTICLE 4.
CONTRIBUTION ALLOCATIONS AND VESTING

4.1.	Allocation of Employee Contributions. 401(k) Contributions and Catch-Up Contributions made by a Company pursuant to the Participant’s election will be allocated to the 401(k) Account of the Participant on whose behalf they are made.
4.2.	Company Contributions.

(a)	Allocation of Matching Contributions. Matching Contributions will be allocated to the Matching Account of the Participant on whose behalf they were made under the terms of the Plan.
(b)	Allocation of Discretionary Matching Contributions. Discretionary matching contributions made pursuant to Section 3.2(b) and forfeitures described in Section 4.5, if any, will be allocated to the Matching Accounts of Participants pro rata on the basis of all 401(k) Contributions made during the Plan Year to those Participants employed on the last day of the Plan Year
(c)	Allocation of Discretionary Contributions. Profit sharing contributions made pursuant to Section 3.2(c) will be allocated to a Participant’s Employer Account on the basis that the Participant’s Compensation bears to the total of all Participants’ Compensation.
(d)	Allocation of Qualified Nonelective Contributions. If the Company elects to make a Qualified Nonelective Contribution for a Plan Year, such contribution will be allocated only to Participants who are Nonhighly Compensated Employees, either (i) in the ratio that each such Participant’s Compensation bears to the total Compensation of all such Participants for the Plan Year, or (ii) using another method of allocation permitted under Treasury Regulation Section 1.401(k)-2(a)(6). Qualified Nonelective Contributions shall be treated as 401(k) Contributions for all purposes under the Plan to the extent used to satisfy the ADP test described in Schedule A.
(e)	Allocation of Qualified Matching Contributions. If the Company elects to make a Qualified Matching Contribution for a Plan Year, such contribution will be allocated only to Participants who are Nonhighly Compensated Employees, either (i) in the ratio that each Participant’s 401(k) Contributions under Section 3.1(a) for the Plan Year bears to the total 401(k) Contributions under Section 3.1(a) of all such Participants for the Plan Year, or (ii) using another method of allocation permitted under Treasury Regulation Section 1.401(m)-2(a)(6). Qualified Matching Contributions shall be treated as 401(k) Contributions for all purposes under the Plan to the extent used to satisfy the ADP test described in Schedule A.
(f)	Allocation of Makeup Contribution. A contribution made pursuant to Section 3.3 will be allocated in accordance with the Committee’s direction to reinstate a former Participant’s Account or, as necessary, to correct a mistake or omission.

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(g) Allocation of Rollover Contribution. A Rollover Contribution made by a Participant will be allocated to the Participant’s Rollover Account.

4.3. Limitation on Annual Addition.

(a) Definitions. The following terms used in this section shall have the following meanings:

(i)

The term “Annual Additions” means the sum of (1) the Employer contributions under the Plan (including elective deferrals to a 401(k) plan) credited to a Participant for any Limitation Year, (2) forfeitures credited to a Participant for any Limitation Year, (3) the Participant’s after-tax Contributions for a Limitation Year, (4) amounts described in Code Sections 415(l)(1) and 419A(d)(2) , and (5) allocations under a simplified employee pension.

(ii)

The term “Dollar Limitation” means $45,000, as adjusted pursuant to Code Section 415(d).

(b) Limitation on Maximum Annual Additions.

(i)	Notwithstanding any provision of the Plan to the contrary, the Annual Additions credited to a Participant’s Account in any Limitation Year shall not exceed the lesser of the Dollar Limitation in effect for the Limitation Year or one hundred percent (100%) of the Participant’s compensation as defined in Code Section 415(c)(3) for such Limitation Year.
	The compensation limit referred to above shall not apply to any contributions for medical benefits after separation from service (within the meaning of Code Sections 401(h) or 419A (f)(2)) which are otherwise treated as an annual addition.
(ii)	If as a result of a reasonable error in estimating a Participant’s compensation, or under other circumstances approved by the Commissioner of Internal Revenue, this limitation is exceeded, the Administrator shall eliminate the excess amount in the following order: (1) apply the provisions of any other plans to the extent that such provisions would reduce the excess amount in the Participant’s Account; or (2) distribute 401(k) Contributions and forfeit any Matching Contributions or Discretionary Matching Contributions attributable thereto made for the year to the extent that the distribution would reduce the excess amount in the Participant’s Account.
(iii)	If unallocated portions are held in a suspense account at the time of the complete termination of the Plan and such unallocated portions may not be allocated as a result of the limitations of this subsection, then such unallocated portions shall be returned to the Employer.

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(iv) If 401(k) Contributions are returned to the Participant under this subsection, then such returned amounts shall not be included for purposes of the limitations of Code Section 402(g), the ADP test and the ACP test.

(v)	The limitations of this subsection are intended solely to satisfy the requirements of Code Section 415 and shall at no time prevent the payment of any benefits not prohibited by the Code or Treasury regulations issued thereunder.
(vi)	For purposes of this section, all defined contribution plans maintained by Affiliates shall be treated as a single plan whether or not such plans have been terminated.

4.4. Vesting.

(a) A Participant shall be vested in his Account under the Plan as follows:

(i)	401(k) Account — 100%
(ii)	Matching Account and Employer Account:

Years of Service	Vested Percentage
1		0
2		25
3		50
4		75
5		100

(iii)	Rollover Account — 100%
(iv)	Nonelective Contribution Account — 100%

(b)	Notwithstanding the foregoing, if a Participant dies, becomes Totally and Permanently Disabled or attains age 65 while employed by a Company he or she shall become 100% vested in his or her Account.
(c)	All Service with the Company counts for purposes of vesting under the Plan, except that any Employee who terminates employment with fewer than two Years of Service and is later reemployed shall lose those Years of Service for vesting purposes if the reemployment occurs after such Employee incurs five consecutive One Year Periods of Severance.

4.5. Forfeitures. A Participant who terminates employment for any reason will forfeit his or her non-vested Matching Account and/or Employer Account as of the earlier of the date the Participant receives a distribution of his or her entire vested Matching and/or Employer Accounts, or the last day of the Plan Year in which the Participant incurs 5

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consecutive One Year Periods of Severance. A Participant who has no vested Matching and Employer Accounts will be deemed to have received a distribution and forfeit his or her said Matching and Employer Accounts as of the date on which he or she terminated employment.

Forfeitures are allocated as a Discretionary Matching Contribution, except as provided in Section 6.8.

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ARTICLE 5.
VALUATION OF FUND AND ALLOCATION OF GAINS AND LOSSES

5.1.

Valuation of Fund. The Trustee shall value the Trust as of the last Valuation Date of each Plan Year or such other period as the Trustee determines, and the Trustee shall report the value of the net worth of the Trust to the Committee in writing upon the completion of the valuation. In determining the net worth of the Trust, the Trustee shall value the assets at fair market value as of such Valuation Date and shall deduct from the Trust expenses, charges, and fees of the Trust unless such expenses, charges, and fees have been guaranteed or reimbursed by the Company.

5.2.

Daily Valuation. Participants’ Accounts may be valued using a daily valuation method of accounting. Under the daily valuation method of accounting, all amounts held in the Trust are invested as a unit or in accordance with the provisions of certain other limited investment options as allowed by the Committee and the Trustee. As of each Valuation Date, the Trustee shall adjust each Investment Fund in the Participants’ Accounts (including a suspense account and any other accounts maintained for daily valuation accounting purposes) in the following manner (but not necessarily in the same order):

(a)	Value at current fair market value the assets of the Trust.
(b)	Adjust the Participants’ Account Balances (including any suspense accounts) for any gain or loss since the last Valuation Date.
(c)	Subtract all payments or distributions made from the Participants’ Accounts since the preceding Valuation Date, including any adjustments for fees and expenses of the trust charged to the Participants’ Account Balances.
(d)	Add the 401(k) Contributions, Matching Contribution, Qualified Non-Matching and/or Nonelective Contributions or any other contributions made to the Trust since the last Valuation Date to the appropriate accounts.
(e)	Debit or credit, as applicable, the Investment Funds in accordance with a Participant’s change in investment election pursuant to Article 9.

Notwithstanding the foregoing, if the Plan holds an asset that cannot be valued readily on a daily basis, the Committee and the Trustee may treat that asset separate and apart from the daily valuation accounting and may value that asset at such time or times as deemed necessary, but at least annually.

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ARTICLE 6.
PAYMENT OF BENEFITS

6.1.	Distribution of Benefits. If a Participant separates from service or becomes Disabled, the Participant’s vested Account Balance shall be payable in accordance with this Article.
6.2.	Amount, Time and Method of Payment.

(a)	When a Participant’s vested Account Balance becomes payable, a distribution of the vested Account Balance, valued as of the Valuation Date preceding distribution, will be made to the Participant with the Participant’s consent as soon as administratively practicable in accordance with this Article.
(b)	If consent is required and the Participant does not consent to a distribution, the Account Balance will remain invested under the Plan, subject to the Participant’s right to direct the investment of the Account.
(c)	If a Participant receives a distribution, any contributions credited to the Participant’s Account subsequent to such distribution shall become distributable as of their allocation to the extent vested.
(d)	Distribution of a Participant’s vested Account Balance shall begin no later than sixty (60) days after the end of the Plan Year in which occurs the later of:

(i)	the Participant’s attainment of age 65,
(ii)	the tenth anniversary of the Participant’s participation in the Plan, or
(iii)	the Participant’s termination of employment with the Company.

(e) Method of Payment. When a Participant’s vested Account is distributable, a Participant has the right to elect in writing, on a form approved by and filed with the Committee, to have his or her vested Account Balance distributed in a single lump sum payment.

6.3.	Small Benefit Payments. Effective for distributions made on and after March 28, 2005, notwithstanding Section 6.2, if the Participant’s vested Account Balance is $1,000 or less, the Committee will pay the Participant or designated Beneficiary (if the benefit payable is a death benefit) the value of the Account Balance in a lump sum payment as soon as administratively practicable, without the consent of the Participant.
	If the Participant’s vested Account Balance is greater than $1,000 and equal to or less than $5,000 and if the Participant does not elect to receive the distribution directly or have such Account Balance paid as a direct rollover to an Eligible Retirement Plan specified by the Participant, then the Committee will pay the distribution in a direct rollover to an individual retirement account designated by the Committee.
	The value of a Participant’s vested Account Balance shall be determined without regard

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to that portion of the Account Balance that is attributable to rollover contributions (and earnings applicable thereto) within the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16). If the value of the Participant’s Account Balance as so determined is $1,000 or less, the Plan shall immediately distribute the Participant’s entire vested Account Balance.

6.4.	Minimum Distribution Rules. The Trustee must distribute or commence distribution of a Participant’s entire interest in his or her Account no later than the Required Beginning Date. Notwithstanding any provision in the Plan to the contrary, required minimum distributions will be determined and made in accordance with Article 15.
6.5.	Election of Direct Rollover. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee’s election, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover.
6.6.	Definitions.

(a)	Eligible Rollover Distribution. An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities) and any hardship withdrawal distributed in accordance with Section 8.1.
(b)	Eligible Retirement Plan. An Eligible Retirement Plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), an annuity contract described in Code Section 403(b), an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, which agrees to separately account for amounts transferred into such plan from this Plan, or a qualified trust described in Code Section 401(a) that accepts the Distributee’s Eligible Rollover Distribution. The definition of Eligible Retirement Plan shall also apply to a Surviving Spouse, or to a Spouse or former spouse, who is the alternate payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p).
(c)	Distributee. A Distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s Surviving Spouse and the Employee’s or former Employee’s Spouse or former Spouse who is the alternate

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payee under a Qualified Domestic Relations Order are Distributees with regard to the interest of the Spouse or former Spouse.

(d) Direct Rollover. A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee.

6.7.	Qualified Domestic Relations Order Payments. A domestic relations order relating to benefits under this Plan shall be reviewed by the Committee in accordance with the Committee’s QDRO procedures. The Committee shall establish procedures for processing domestic relations orders and determining the qualified status of any such order in accordance with IRS guidance, rulings or regulations. If the order is a Qualified Domestic Relations Order received by this Plan, the Committee will authorize payment to the alternate payee pursuant to the terms of the Qualified Domestic Relations Order as soon as administratively practicable without regard to the time distribution would be made with respect to the affected Participant.
6.8.	Reemployment. If a former Participant who received a lump sum distribution from the Plan upon termination of employment is reemployed, such Participant shall have the right to have the nonvested portion of his or her Account Balance that was forfeited restored upon repayment to the Plan of the full amount of the distribution. To receive a restoration of the forfeited amount, the repayment must be made before the Participant incurs five consecutive One Year Periods of Severance. If a former Participant who was deemed to have received a distribution is reemployed before incurring five consecutive One Year Periods of Severance, such Participant will be considered to have repaid the deemed distribution as of the date of reemployment.
	The restoration allocation will be in the amount of the forfeiture and will not be adjusted for gains or losses which occurred after the forfeiture arose. The restoration of such forfeited amount shall be made first from forfeitures arising under Section 4.5, then, if necessary, by an additional Company contribution.

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ARTICLE 7.
DEATH BENEFITS

7.1.	Death Benefits. A Participant’s Account Balance is payable upon his or her death prior to commencement of benefit payments to the Participant’s Beneficiary determined in accordance with Section 7.2, exclusive of any portion of the Account subject to a Qualified Domestic Relations Order.
7.2.	Designation of Beneficiary. If a Participant is not married, he or she may file a designation of Beneficiary with the Committee. The designated Beneficiary shall be entitled to receive any death benefit payable under the Plan in accordance with Section 7.1. If a Participant is married at the time of his or her death, the Beneficiary of such deceased Participant will be the Participant’s Surviving Spouse, unless the Participant has filed a Qualified Designation of Beneficiary with the Committee. A “Qualified Designation of Beneficiary” means a form provided by the Committee on which the Participant’s Spouse consents in writing to the designation of a Beneficiary other than the Spouse. The written consent must be witnessed by a Notary Public. A Spouse’s consent is irrevocable when given. A Qualified Designation of Beneficiary may be revoked at any time by the Participant and a new Qualified Designation of Beneficiary filed with the Committee. If the Surviving Spouse or designated Beneficiary predeceases the Participant and no contingent beneficiary is named, or if there is no valid designation of Beneficiary executed by a Participant, the death benefit payable under this section will be paid to the Participant’s estate.
7.3.	Time and Method of Payment.

(a)	Distributions that began before death. If the Participant dies after distribution of his or her Account Balance has begun, the remaining portion will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant’s death.
(b)	Distribution beginning after death. If the Participant dies before distribution of his or her Account Balance has begun, distribution of the Participant’s entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death, except to the extent that an election is made to receive distributions in accordance with (i) or (ii) below:

(i)	if any portion of the Participant’s interest is payable to a designated Beneficiary, distributions may be made over a period certain not greater than the life expectancy of the designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died;
(ii)	if the designated Beneficiary is the Participant’s Surviving Spouse, the date distributions are required to begin in accordance with (i) above shall not be earlier than the later of (1) December 31 of the calendar year immediately following the calendar year in which the Participant died, or

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(2) December 31 of the calendar year in which the Participant would have attained age 70¹/2.

	If the Participant has not made an election pursuant to this Section 7.3(b) by the time of his or her death, the Participant’s designated Beneficiary must elect the method of distribution no later than the earlier of (A) December 31 of the calendar year in which distributions would be required to begin under this section, or (B) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the designated Beneficiary does not elect a method of distribution, distribution of the Participant’s entire interest will be paid in a lump sum by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
(c)	For purposes of Section 7.3(b) above, if the Surviving Spouse dies after the Participant, but before payments to such Spouse begin, the provisions of Section 7.3(b), with the exception of paragraph (ii) therein, shall be applied as if the Surviving Spouse were the Participant.
(d)	Death benefit distributions shall be made in accordance with Code Section 401(a)(9) and applicable IRS guidance, rulings and regulations.
(e)	Distributions shall be made in accordance with Section 6.3 if the Participant’s Account Balance is $5,000 or less as determined under that Section.

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ARTICLE 8.
IN-SERVICE WITHDRAWALS BY PARTICIPANTS

8.1. Hardship Withdrawals from 401(k) Account. A Participant may request a distribution of his or her 401(k) Contributions in the event of hardship. For the purposes of this section, a distribution is made on account of hardship only if the distribution is made both on account of an immediate and heavy financial need of the Participant and is necessary to satisfy the financial need. This section is intended to comply with Internal Revenue Service regulation §1.401(k)-1(d)(2) and will be interpreted and applied in accordance with that regulation.

(a) The following are the only financial needs considered immediate and heavy:

(i)	Expenses for medical care (described in Code Section 213(d) previously incurred by the Participant, the Participant’s Spouse, or any dependent of the Participant (as defined in Code Section 152, without regard to Code Sections 152(b)(1), (b)(2), and (d)(1)(B)) or amounts necessary for these persons to obtain such medical care;
(ii)	Costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);
(iii)	Payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, the Participant’s Spouse, children or dependents (as defined in Code Section 152, without regard to paragraphs (b)(1), (b)(2) and (d)(1)(B));
(iv)	Payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage of, the Participant’s principal residence;
(v)	Payments for funeral or burial expenses for the Participant’s deceased parent, Spouse, child or dependent (as defined in Code Section 152, without regard to paragraph (d)(1)(B));
(vi)	Expenses to repair damage to the Participant’s principal residence that would qualify for a casualty loss deduction under Code Section 165 (determined without regard to whether the loss exceeds 10 percent of adjusted gross income); or
(vii)	Any other financial need considered immediate and heavy under IRS regulations, rulings, notices or other documents of general applicability.

(b)	When a Participant takes a hardship distribution, he or she will be suspended from making elective deferrals to any 401(k) plan maintained by the Company or an Affiliate for six months following receipt of the hardship distribution.
(c)	A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if:

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(i)	The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Company; and
(ii)	The distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution).

8.2.	Withdrawal from Rollover Account. Upon written notice to the Committee, a Participant may withdraw all or part of his or her Rollover Account.
8.3.	Withdrawals after Age 591/2. Upon written notice to the Committee, a Participant who has attained age 591/2 may withdraw all or part of his or her Account.
8.4.	Limitations on Withdrawals.

(a)	No distribution will be made under this Article which will result in a distribution amount of less than $500 or the total amount available for withdrawals, if less. This limitation is applicable to each type of account and is not an aggregate limitation.
(b)	In the case of a partial withdrawal made by a Participant having an interest in more than one Investment Fund, the amount withdrawn from each Investment Fund shall be in the same proportion as the value of his interest in each such Investment Fund immediately preceding such withdrawal bears to the total value of the account from which the withdrawal is made.

8.5.	Automated Withdrawals. The written notice for a withdrawal is not required in the event a withdrawal is processed through an automated voice response unit or similar automated method provided by the Plan’s recordkeeper in accordance with the recordkeeper’s procedures.
8.6.	Special Rules for Qualified Hurricane Distributions. Notwithstanding anything in the Plan to the contrary, the Plan will permit Qualified Hurricane Distributions. The following provisions shall apply effective August 25, 2005:

(a) A Qualified Hurricane Distribution is

(i)	any distribution made on or after August 25, 2005, and before January 1, 2007, to a Participant whose principal residence on or after August 25, 2005, was in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina; or
(ii)	any distribution made on or after September 23, 2005, and before January 1, 2007, to a Participant whose principal residence on or after September 23, 2005, was in the Hurricane Rita disaster area and who has sustained an economic loss by reason of Hurricane Rita; or

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(iii) any distribution made on or after October 23, 2005, and before January 1, 2007, to a Participant whose principal residence on or after October 23, 2005, was in the Hurricane Wilma disaster area and who has sustained an economic loss by reason of Hurricane Wilma.

(b)	The aggregate amount of Qualified Hurricane Distributions received by any Participant in a taxable year and all prior taxable years shall not exceed $100,000.
(c)	A Participant who receives a Qualified Hurricane Distribution has the right at any time during a three year period commencing on the day after the Qualified Hurricane Distribution is received to make one or more contributions that do not exceed the amount of such distribution to the Plan or any other Eligible Retirement Plan within the meaning of Code Section 402(c)(8)(B).
(d)	A Participant who receives a Qualified Hurricane Distribution may elect to have any amount required to be included in gross income for such taxable year, to instead be included in income ratably over the three year period beginning with such taxable year.
(e)	The 10% additional tax on early distributions under Code Section 72(t) shall not apply to any Qualified Hurricane Distribution.
(f)	Qualified Hurricane Distributions shall not be treated as Eligible Rollover Distributions for purposes of Code Sections 401(a)(31), 402(f), and 3405.

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ARTICLE 9.
INVESTMENT OF TRUST ASSETS — PARTICIPANT
DIRECTED INVESTMENTS

9.1.	Participant Directed Investments. Each Participant has the right to direct the investment of his or her Account. A Participant’s investment direction is limited to the Investment Funds selected by the Committee. For this purpose, the term Investment Fund shall include an individually directed brokerage account offered under the Plan.
	A Participant’s investment direction shall be made in accordance with the procedures established by the Committee and/or the Trustee governing the manner and method in which such direction may occur. The Participant may change his or her investment selections and make transfers among Investment Funds at such times as are permitted by the Trustee and the Committee in accordance with the procedures and rules established by the Trustee and the Committee.
	Notwithstanding the foregoing, the Trust may have one or more assets which are not subject to individual direction and, shall be invested in accordance with the Trustee’s directions. In this event the Plan shall maintain appropriate records to determine each Participant’s undivided interest in such asset or assets.
	If a Participant has not provided investment direction, the Committee shall determine the default investment in which the Participant’s Account shall be invested.
9.2.	Voting Rights. Voting rights with respect to stock or other securities in the respective Investment Funds may be exercised by the Trustee or by such proxy as the Trustee may elect.

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ARTICLE 10.
PLAN ADMINISTRATION

10.1.	Establishment of the Employee Benefits Committee. The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in the Employee Benefits Committee. The Committee is the plan administrator (within the meaning of Section 3 of ERISA and Code Section 414(g)) with such authority, responsibilities and obligations as ERISA and the Code grant to and impose upon persons so designated. For purposes of ERISA, the Committee shall be a “named fiduciary” under the Plan. If no Committee is appointed by the Board of Directors of the Employer, the Employer shall be the plan administrator and named fiduciary of the Plan and shall have all the rights, duties and powers of the Committee set forth in this Article.
	Any member of the Committee may resign by delivering a written resignation to the secretary of the Committee. Such resignation shall be effective thirty (30) days after the date the notice is received, or on an earlier date designated by majority vote of the Committee’s remaining members.
	No member of the Committee who is also an Employee receiving regular compensation as such shall receive any compensation for his or her services as a member of the Committee. No bond or other security shall be required of any member of the Committee in any jurisdiction. No member of the Committee shall, in such capacity, act or participate in any action directly affecting his or her own benefits under the Plan other than an action which affects the benefits of Participants generally or groups of Participants.
10.2.	Powers of the Employee Benefits Committee. The powers of the Committee include, but are not limited to, the following:

(a)	establishing its own rules for governance and determining the times and places for holding meetings of the Committee and the notice to be given of such meetings;
(b)	employing such agents and assistants, such counsel (who may be counsel to the Company), and such clerical, medical, accounting, actuarial and investment services or advisers as the Committee may require in carrying out the provisions of the Plan;
(c)	authorizing one or more of their number or any agent to make any payment, or to execute or deliver any instrument, on behalf of the Committee, except that all requisitions for funds from, and requests, directions, notifications and instructions to the trustee of the Plan shall be signed by at least two members of the Committee;
(d)	in its discretion, establishing one or more subcommittees as it deems appropriate, and delegating any power or duty granted to the Committee to any such subcommittee;

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(e)	appointing and removing the Trustee of the Plan pursuant to the terms of the trust agreement;
(f)	receiving and reviewing reports from the Trustee of the Plan as to the financial condition of the Trust, including its receipts and disbursements;
(g)	executing and filing with the appropriate governmental agencies such registration and other statements, forms, applications, notifications, and other documents or information as the Committee may from time to time deem necessary or appropriate in connection with the Plan;
(h)	amending the Plan to the extent it is authorized to do so by the Board or the terms of the Plan; and
(i)	directing the Trustee, or appointing one or more investment managers to direct the Trustee, subject to the conditions set forth in the trust agreement and in this article, in all matters concerning the investment of the Trust;

10.3. Duties and Authority of the Employee Benefits Committee.

(a)	The Committee shall have the general responsibility for administering the Plan and carrying out its provisions. Subject to the limitations of the Plan, the Committee from time to time shall establish rules for the administration of the Plan and the transaction of its business and shall promulgate such rules as may be necessary to effectuate the Plan’s funding and investment policy. The Committee, in its sole discretion, shall determine all matters of administration and Plan interpretation and the amounts of and rights to benefits payable under the Plan. Provided however, to the extent the Committee delegates its discretion to determine matters of administration, interpretation and amounts of and rights to benefits payable under the Plan to a subcommittee such subcommittee shall have the sole discretion to make such determinations.
(b)	It shall be the duty of the Committee to notify the Trustee in writing of the amount of any benefit which shall be due to any Participant and in what form and when such benefit is to be paid.
(c)	The responsibility for the formulation of the general investment practices and policies of the Plan and its related Trust and for effectuating such practices and policies is placed with the Committee.

10.4. Actions by the Committee or a Subcommittee. The majority of the members of the Committee, but no fewer than two, or a subcommittee established pursuant to Section 10.2(d) (a “Subcommittee”) shall constitute a quorum for the transaction of business at any meeting. Resolutions or other actions made or taken by the Committee or subcommittee shall require the affirmative vote of a majority of the members of the Committee or subcommittee attending a meeting, or by a majority of members in office by writing without a meeting.

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10.5. Indemnification. To the extent not contrary to ERISA or applicable state law, the Employer shall indemnify the Committee and its members and any other director, officer or employee of a company who is designated to carry out any responsibilities under the Plan for any liability, joint and/or several, arising out of or connected with their duties hereunder to the fullest extent permitted by law except where the conduct of the individual constitutes gross negligence or willful misconduct as determined in the sole discretion of the Employer.

10.6. Benefit Application and Claims Procedure.

(a)

A Participant or Beneficiary shall apply for benefits by filing with the Committee a signed, written request specifically identifying the benefits requested and describing all facts and circumstances entitling him or her to payment. A written request is not required if distribution is processed through an automated voice response unit or similar automated method provided by the Plan’s recordkeeper in accordance with the recordkeeper’s procedures.

(b)

Within 90 days (45 days if the application is for disability benefits) after receipt of such an application, the Committee shall notify the applicant of its decision. If special circumstances require an extension of time, the Committee shall notify the applicant of such circumstances within 90 days (30 days for disability claims) after receipt of the application, and the Committee shall thereafter notify the applicant of its decision within 180 days (105 days for disability claims) after receipt of the application. If the application is denied in whole or in part, the Committee’s notice of denial shall be in writing and shall state:

(i)	the specific reasons for denial with specific reference to pertinent Plan provisions upon which the denial is based;
(ii)	the specific references to the pertinent provisions of the Plan upon which the denial is based;
(iii)	a description of any additional materials or information necessary for the applicant to perfect his or her claim and an explanation of why the materials or information are necessary;
(iv)	an explanation of the Plan’s claim review procedure set forth in this section; and
(v)	notice of the applicant’s right to bring a civil action under Section 502 (a) of ERISA if the applicant appeals and the appeal is denied.

(c) During the 60 day period (180 day period for disability claims) following an applicant’s receipt of a notice of denial of his or her application for benefits, the applicant or his or her duly authorized representative may review pertinent documents and within 60 days (180 days for disability claims) submit a written request to the Committee for an appeal of the denial. An applicant requesting an appeal, or his or her duly authorized representative, may submit issues and

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comments in writing to the Committee. The Committee shall consider the merits of the applicant’s presentations, the merits of any facts or evidence in support of the denial of benefits, and such other facts and circumstances as the Committee shall deem relevant; and shall render a decision as to the merit of the appeal and the claim. Within 60 days (45 days for disability claims) after receipt of the request for appeal, the Committee shall issue a written decision to the applicant. If special circumstances require an extension of time, the Committee shall issue a written decision no later than 120 days (90 days for disability claims) after receipt of the request for appeal.

Notwithstanding the foregoing, if the claim relates to disability, the review of the claim will be handled completely independently of the findings and decision made regarding the initial claim and will be processed by an individual who is not a subordinate of the individual who denied the initial claim. If the claim requires medical judgment, the individual handling the appeal will consult with a medical professional who was not consulted regarding the initial claim and who is not a subordinate of anyone consulted regarding the initial claim and that medical professional will be identified to the applicant.

The Committee’s decision shall state:

(i)	specific reasons for the denial;
(ii)	specific references to the pertinent provisions upon which the decision is based;
(iii)	notice that the applicant is entitled to receive, upon request and free of charge, copies of all documents, records and other information relevant to the applicant’s claim for benefits; and
(iv)	notice of the applicant’s right to bring an action under Section 502(a) of ERISA.

10.7.

Responsibilities of Named Fiduciaries Other than the Committee. The Trustee shall have such responsibilities with respect to the operation of the Plan as are set forth in the trust agreement. Any investment adviser which the Committee may employ shall have the responsibility to direct the Trustee in investing and reinvesting the Trust (or that portion thereof specified by the Committee in the instrument appointing such adviser) and to report the book value and fair market value of each asset in the Trust (or such portion thereof) to the Committee periodically, as such responsibilities may be more fully described in the trust agreement.

10.8.

Allocation of Responsibilities. The description of the responsibilities and powers of the Committee and the description of the responsibilities of the Trustee contained in the foregoing provisions of this article shall constitute, for purposes of ERISA, procedures for allocating responsibilities operation and administration of the Plan among the named fiduciaries.

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10.9.

Designation of Persons to Carry Out Responsibilities of Named Fiduciaries. The Committee, the Trustee and any investment adviser which the Committee employs may, except as to responsibilities involving management and control of assets held in the Trust, designate one or more other persons to carry out any or all of their respective responsibilities under the Plan, provided that such designation shall be made in writing, filed with the Plan’s records and made available for inspection upon request by any Participant or Beneficiary under the Plan.

10.10.

Payment of Expenses. All expenses that shall arise in connection with the administration of a Plan and Trust, including, but not limited to, the compensation of the Trustee and of any recordkeeper, accountant, counsel, investment adviser, other expert or other person who shall be employed by the Committee in connection with the administration thereof, shall be paid from the Trust, unless paid by the Company; provided, however, that no person who is employed by the Company shall receive any compensation from the Plan except for reimbursement of expenses properly and actually incurred.

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ARTICLE 11.
PLAN ADOPTION, AMENDMENT OR TERMINATION

11.1. Amendment of Plan.

(a)

The Employer reserves the right to terminate the Plan or to modify, alter or amend the Plan from time to time as it may, in its sole and complete discretion, deem advisable, including, but without limiting the generality of the foregoing, any amendment deemed necessary to qualify or to ensure the continued qualification of the Plan under the Code. The foregoing right shall be exercised only by action of the Employer’s Board of Directors or other entity authorized to act for the Employer or by action of an officer of the Employer with later ratification by the Employer’s Board, if necessary.

(b)

Notwithstanding Section 11.1(a), the Committee, by a written instrument, duly executed by a majority of its members, may make, on behalf of the Employer’s Board of Directors,

(i)	any amendment that may be necessary or desirable to ensure the continued qualification of the Plan and its related Trust under the Code or which may be necessary to comply with the requirements of ERISA, or any regulations or interpretations issued by the Department of Labor or the Internal Revenue Service with respect to the requirements of ERISA or the Code, or
(ii)	any amendment that is required by the provisions of a collective bargaining agreement between a Company and its employees.

11.2.	Merger. In the case of any merger or consolidation of a Plan with, or any transfer of the assets or liabilities of a Plan to any other plan qualified under Code Section 401, the terms of such merger, consolidation or transfer shall be such that each Participant in the Plan would receive (in the event of termination of the Plan or its successor immediately thereafter) a benefit which is no less than the benefit which such Participant would have received in the event of termination of the Plan immediately before the merger, consolidation or transfer.
11.3.	Form of Amendments. Any amendment to the provisions of this instrument shall be evidenced by separate amendment which is made a part of this Plan or by a restatement of the Plan in its entirety.
11.4.	Acceptance of Transferred Assets. In the event of a merger into this Plan of any other plan qualified under Section 401(a) of the Code, the Trustee may accept amounts transferred on behalf of a Participant from such other plan, provided that the Trustee is authorized to do so by the Employer.
11.5.	Plan to Plan Transfers. Notwithstanding any other provisions of this Plan, in the event a Company or a division of the Employer or of a Company ceases to participate under this Plan (ex-Company) and establishes a successor to this Plan for its Participants and the

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Plan Administrator directs a plan to plan transfer, the Trustee at the direction of the Plan Administrator, shall transfer all Accounts to which Participants employed by the formerly participating Company are entitled under this Plan to another plan forming a part of a pension, profit sharing or stock bonus plan maintained by the formerly participating Company (or a member of its controlled group) and which meets the requirements of Code Section 401(a), provided that the plan to which such transfers are made permits the transfer to be made. All transfers to another qualified plan of a formerly participating Company (or a member of its controlled group) shall be made in cash or in kind, as determined by the Plan Administrator in its sole discretion. In accordance with procedures established by the Plan Administrator, in the Plan Administrator’s sole discretion, during the time period when Investment Funds are being liquidated to effectuate the plan to plan transfer, no investment direction changes may be made. No such transfer shall decrease the accrued benefit of any Participant or otherwise deprive a Participant of any rights that are protected by Section 411(d)(6) of the Code.

11.6.

Plan Termination or Partial Termination. Upon termination of the Plan, Participants shall become fully vested in their Account Balances. Upon partial termination of the Plan affected Participants shall become fully vested in their Account Balances. Upon the complete or partial termination of the Plan, the Trustee shall, in accordance with written instructions of the Employer, either (a) distribute to such Participants their Account Balances after payment of any expenses properly changeable to such interests, provided such Account Balances are properly distributable, (b) continue to hold and administer their Accounts in the Plan in accordance with the terms of the Plan, or (c) transfer all or part of the funds to a new plan and trust. Provided further, if the Plan does not provide for employee contributions, but only provides for discretionary profit sharing contributions, then upon complete discontinuance of such discretionary profit sharing contributions, Participants shall be fully vested in their Account Balances .

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ARTICLE 12.
TRUST FUND AND THE TRUSTEE

12.1.

Trust and Trustee. A Trust has been created and will be maintained for the purpose of the Plan, and the corpus thereof will be invested in accordance with the terms of the Plan and Trust. The Committee shall select a Trustee or Trustees to hold and invest the Trust in accordance with the terms of a trust agreement or agreements and/or other contract(s). A Trustee shall be an individual, a bank or trust company incorporated under the laws of the United States or of any state and qualified to operate as a trustee or shall be a legal reserve life insurance company. The Committee may, from time to time, change the Trustee(s) then serving under the trust agreement and/or other contract to another Trustee(s), to elect to terminate the Trust and/or other contract and hold the Plan assets in multiple trusts or in any other method acceptable under Act.

12.2.

Assets of the Trust. Any contributions made to the Plan shall be paid to the Trustee(s) and held in a Trust or Trusts. The Trust(s) shall be held for the exclusive benefit of the Plan’s Participants and their Beneficiaries and shall be used to pay benefits to such persons and to pay administrative expenses of the Plan and Trust to the extent such administrative expenses are not paid by the Company. Assets of the Trust(s) shall never revert or inure to the benefit of the Company, except that contributions may be returned to the Company as provided in Sections 3.7 and 3.8.

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ARTICLE 13.
MISCELLANEOUS

13.1.	Limitation of Assignment. No benefit payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance, and any attempt to anticipate, alienate, sell, transfer, assign, pledge or encumber a benefit shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for, or against, such person, and the same shall not be recognized under the Plan, except to such extent as may be required by law. Notwithstanding the above, this section shall not apply to a Qualified Domestic Relations Order and benefits may be paid pursuant to the provisions of such an order.
13.2.	Legally Incompetent Distributee. Whenever any benefit payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined to be incompetent by qualified medical advice, the Committee need not require the appointment of a guardian or custodian, but is authorized, in its sole discretion, to cause the benefit (a) to be paid to the person having custody of such minor or incompetent, without intervention of a guardian or custodian, (b) to pay the benefit to a legal guardian or custodian of such minor or incompetent if one has been appointed, or (c) to use the payment for the benefit of the minor or incompetent.
13.3.	Unclaimed Payments. If the Committee is unable, after reasonable and diligent effort, to locate a Participant, Spouse, or Beneficiary who is entitled to payment under the Plan, the payment due such person may be forfeited after three years. If such person later files a claim for such benefit, and is determined by the Committee to have a legal right to the benefit, the benefit shall be reinstated (without gain or earnings). Forfeitures arising under this Section 13.3 shall be used to offset Matching Contributions.
13.4.	Notification of Addresses. As a condition of participation in this Plan, Participants are required to provide a current address and other information requested for the administration of the Plan. Each Participant and Beneficiary shall from time to time file with the Committee in writing his or her address or any change of address. Any communication, statement, or notice mailed to the last address filed with the Committee, or if no such address was filed with the Committee, to the last address shown on the Company’s records, will be binding on the Participant or Beneficiary for all purposes, and neither the Committee nor the Company shall be obliged to search for or ascertain the whereabouts of any Participant or Beneficiary.
13.5.	Notice of Proceedings and Effect of Judgment. In any application, proceeding or action in any court, no Participant or other person having any interest in the Plan shall be entitled to any notice or service of process except as required by law. Any judgment or decree entered on account of such application, proceeding or action shall be binding and conclusive upon all persons claiming under this Plan.
13.6.	Severability. If any provisions of a Plan are held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and it shall be construed and enforced as if the illegal and invalid provisions were not included.

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13.7.	Limitation of Rights. Participation in the Plan shall not give any Employee any right or claim except to the extent that such right is specifically fixed under the terms of the Plan. The adoption of the Plan by a Company shall not be construed to give any Employee a right to continue in the employ of a Company or to interfere with the right of a Company to terminate the employment of the Employee at any time.
13.8.	Controlling Law. The laws of the State of Louisiana shall be the controlling state law in all matters relating to the Plan and shall apply to the extent not preempted by the laws of the United States of America.
13.9.	Errors in Payment. If any error shall result in the payment to a Participant or other person of more or less than he/she would have received but for such error, the Committee shall be authorized to correct such error and to adjust the payments to the extent possible in such manner as the Committee determines or, in its discretion, seek restitution from the Participant, former Participant or other person, provided, however, that the Committee need not seek restitution if the Committee determines that doing so would not be cost effective or is otherwise contradicted.
13.10.	USERRA and Code Section 414(u) Compliance. Notwithstanding any provision of this Plan to the contrary, effective December 12, 1994, contributions, benefits, service credit and other rights under the Plan of a Participant with respect to qualified military service will be provided in accordance with Code Section 414(u).
13.11.	Loans. The Company authorizes the Trustee to make loans to a Participant subject to the following terms and conditions:

(a)	Loans shall be made available to all Participants who are current Employees on an equal basis upon completion of application forms provided by the Committee and in accordance with the written loan program established by the Committee. Loans shall be available on a nondiscriminatory basis upon completion of the application form and are based on the Participant’s vested balances in his or her Account. Loans shall not be made available to Participants who are Highly Compensated Employees, officers, or shareholders in percentage amounts greater than the percentage amounts of the values described in paragraph (b) below made available to other Participants;
(b)	The principal amount of a loan to a Participant pursuant to this section may not exceed the lesser of (i) $50,000 (reduced by the highest outstanding balance of loans during the twelve (12) month period ending on the day before the date on which the loan was made), or (ii) fifty (50) percent of the Participant’s vested Accounts Balance.
(c)	Loans shall be made at an interest rate equal to the prevailing interest rate charged by institutions in the business of lending money.
(d)	Principal and interest on loans shall be repaid in equal installments over a period not to exceed five (5) years according to nondiscriminatory rules established by the Committee, provided, however, that the principal and interest on a loan which

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is to be used to acquire a principal residence of the Participant may be repaid in equal installments over a period not to exceed ten (10) years.

(e)	The loan obligation of the Participant shall be evidenced by a promissory note which shall contain the terms of repayment and such other terms and provisions as may be necessary or advisable;
(f)	The obligation of the Participant shall be adequately secured, as determined by the Committee and such security may include up to fifty (50) percent of the vested balance of the Account maintained for the Participant in the Plan.

The Committee may prescribe such additional rules and procedures as it may deem appropriate, including, without limitation, rules and procedures by which the making of loans to Participants or to any class of Participants may be terminated, suspended, or restricted, if and to the extent deemed by the Committee to be necessary or desirable in order to effect compliance with applicable laws and regulations, pursuant to a Participant loan program which shall be established in writing and which when properly executed is hereby incorporated by reference and made a part of the Plan. The loan program may be amended by the Committee, without the need to amend the Plan.

13.12. Headings and Use of Words. Headings are for convenience in referencing only and are not to be used in interpretation of the Plan. The use of a masculine term shall include the feminine where applicable. Whenever the context of the Plan dictates, the plural shall be read as the singular and the singular shall be read as the plural.

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ARTICLE 14.
TOP-HEAVY PROVISIONS

14.1.	Applicability of this Article. This Article shall apply for any Plan Year in which the Plan is a Top-Heavy Plan within the meaning of Sections 14.2 and 14.4.
14.2.	Top-Heavy and Super Top-Heavy Determination.

(a)	The Plan shall be a Top-Heavy Plan for a Plan Year if, as of the Determination Date, the aggregate of the Account Balances under the Plan for Key Employees exceeds 60 percent of the aggregate of the Account Balances under the Plan for all Employees.
(b)	The Plan shall be a Super Top-Heavy Plan if, as of the Determination Date, the aggregate of the Account Balances under the Plan for Key Employees exceeds 90 percent of the aggregate of the Account Balances under the Plan for all Employees.

14.3. Computation of the Aggregate of the Account Balances.

(a)	The Account Balance of an Employee shall be the sum of (i) the Account Balance as of the most recent Valuation Date occurring within a twelve (12) month period ending on the Determination Date and (ii) the amount of any contributions that would be allocated as of a date not later than the Determination Date without regard to whether such amount is subject to a waiver of the minimum funding standards or is in violation of such standards or actually contributed or, in the case of a Plan not subject to the minimum funding standards, the amount of any contributions actually made after the Valuation Date, but before the Determination Date.
(b)	If an Employee is a Key Employee on a Determination Date, the total amount of the Employee’s Account Balance is taken into account in determining the aggregate of Account Balances (including amounts attributable to service as a Non-Key Employee). If any individual is a Non-Key Employee with respect to the Plan for a Plan Year, but such individual was a Key Employee for any prior Plan Year, the Account Balance of such individual shall not be taken into account.
(c)	If an Employee has not performed any service for the Company or an Affiliate at any time during the five-year period ending on the Determination Date, any accrued benefit and Account Balance of such Employee shall not be taken into account.
(d)	Additional rules:

(i) In the case of an unrelated rollover, the plan making the distribution counts it in determining top-heaviness, and the plan receiving the distribution does not count it in determining top-heaviness. An unrelated rollover is a rollover or plan-to-plan transfer both initiated by the

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	Employee and made from a plan maintained by one company to a plan maintained by another company.
(ii)	In the case of a related rollover, the plan making the distribution does not count the distribution in determining top-heaviness and the plan receiving the distribution counts the rollover in determining top-heaviness. A related rollover is a rollover or a plan-to-plan transfer either not initiated by the Employee or made to a plan maintained by the same company.
(iii)	For purposes of determining whether the company is the same company, all companies aggregated under Code Section 414(b), (c) or (m) are treated as the same company.

(e) The amounts of Account Balances of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with this Plan under Code Section 416(g)(2) during the 1-year period ending on the Determination Date. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting “5-year period” for 1-year period”.

14.4. Required Aggregation of Plans.

(a) Each plan of a company required to be included in an aggregation group shall be treated as a Top-Heavy Plan if the required aggregation group is a top-heavy group. The required aggregation group includes:

(i)	each plan of the company (within the meaning of Code Section 414(b), (c) and (m)) in which a Key Employee participates in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and
(ii)	each other plan of the company which enables any plan described in (i) above to meet the requirements of Code Section 401(a)(4) or Code Section 410.

(b) A required aggregation group is a top-heavy group if, as of each Plan’s Determination Date, the sum of (i) the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in the group and (ii) the aggregate of the Account Balances of Key Employees under all defined contribution plans included in the group exceeds 60 percent of a similar sum determined for all Employees. When aggregating plans, the value of accrued benefits and Account Balances shall be calculated by adding together the results of each plan as of the Determination Dates that fall within the same calendar year. In performing this computation the principles of Section 14.3 shall be applied.

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(c) Each plan in the required aggregation group will be a Top-Heavy Plan if the group is top-heavy. No plan in the required aggregation group will be a Top-Heavy Plan if the group is not top-heavy.

14.5.

Permissive Aggregation of Plans. A permissive aggregation group consists of plans of the Company that are required to be aggregated, plus one or more plans that are not part of the required aggregation group, but that satisfy the requirements of Code Sections 401(a)(4) and 410 when considered as a group. In no event will permissively aggregated plans which are not part of the required aggregation group be considered top-heavy. If, as a result of the permissive aggregation of plans the entire group of plans is not top-heavy, then no plan in the permissive aggregation group will be a Top-Heavy Plan. Plans may be permissively aggregated to avoid being super top-heavy.

14.6.

Special Rules of Top-Heavy Plans and Super Top-Heavy Plans.

(a)	If the Plan is a Top-Heavy Plan, then the following changes shall be made to the Plan as otherwise written:
	The allocation of Company contributions and forfeitures to the account of a Non-Key Employee for a Plan Year shall equal at least three (3%) percent of Compensation. Notwithstanding the foregoing, if the largest percentage of compensation provided for any Key Employee is less than three (3%) percent, then the minimum percentage of compensation that must be provided for a Non-Key Employee for a Plan Year is the largest percentage of compensation provided for any Key Employee. The preceding sentence does not apply if this Plan is included in any required aggregation group and enables a defined benefit plan included in such group to meet the requirements of Code Section 401(a)(4) or Section 410. For purposes of determining the largest percentage of compensation provided for any Key Employee, amounts contributed as a result of a salary reduction agreement must be included. All defined contribution plans of the Company and Affiliates shall be treated as a single plan for purposes of determining the defined contribution minimum. Amounts the Employee elects to defer under any 401(k) plan maintained by the Company shall not be treated as Company contributions for purposes of determining minimum required contributions.
(b)	The following Non-Key Employees shall receive the minimum allocation provided under (a) above for a particular Plan Year:

(i)	Participants who are otherwise eligible for an allocation under the Plan;
(ii)	Employees who are Participants but who have not completed 1,000 Hours of Service during the Plan Year;
(iii)	Employees who would be Participants but for the failure to make mandatory contributions to the Plan; or

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(iv)	Employees who are Participants but whose compensation is less than the amount necessary to receive an allocation under the Plan: however,
(v)	Employees who are also Participants in a defined benefit plan sponsored by the Company shall receive the minimum benefit under the defined benefit plan.

(c) The compensation of a Participant taken into account under the Plan shall not exceed the dollar amount specified in Code Section 401(a)(17), subject to applicable cost of living increases.

14.7. Special Definitions. For purposes of this article, the following definitions shall apply:

(a)	Determination Date. With respect to any Plan Year, the last day of the preceding Plan Year. In the case of the first Plan Year of the Plan, the Determination Date shall be the last day or such Plan Year.
(b)	Key Employee. Any Employee or former Employee who at any time during the Plan Year containing the Determination Date or any of the four preceding Plan Years, is or was

(i)	An officer of the Company having an annual compensation from the Company greater than $145,000 (as adjusted under Code Section 416(i)(2);
(ii)	The owner of a five percent or more interest in the Company, or
(iii)	The owner of a one percent or more interest in the Company who has annual compensation (as defined in Code Section 415(c)(3) but including amounts contributed by the Company pursuant to a salary reduction agreement which are excludable from the Employee’s gross income under Code 125, 132(f)(4), 402(a)(8), 402(h) or 403(b)) from the Company for a Plan Year of more than $150,000.

For purposes of clause (i) the number of officers of the Company considered to be Key Employees cannot exceed fifty and is further limited to the greater of three or ten percent of all Employees (including leased employees within the meaning of Code Section 414(n)). For purposes of applying the foregoing limitations, the aggregation rules of Code Section 414(b), (c) and (m) apply except with respect to determining ownership. For purposes of determining ownership under clauses (iii) and (iv), an Employee shall be considered as owning an interest in the Company within the meaning of Code Section 318.

(c) Non-Key Employee. Any Employee who is not a Key Employee.

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ARTICLE 15.
MINIMUM DISTRIBUTION REQUIREMENTS

     Notwithstanding any other provisions in this Plan, effective January 1, 2003, unless provided otherwise in this Article 15, the following changes are made by adopting the model minimum required distribution amendment for defined contribution plans found in Revenue Procedure 2002-29.

15.1. General Rules. The provisions of this article will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.

(a)	Precedence. The requirements of this article will take precedence over any inconsistent provisions of the Plan.
(b)	Requirements of Treasury Regulations Incorporated. All distributions required under this article will be determined and made in accordance with the Treasury regulations under Section 401(a)(9) of the Internal Revenue Code.
(c)	TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Article 15, distributions may be made under a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA.

15.2. Time and Manner of Distribution.

(a)

Required Beginning Date. The Required Beginning Date of a Participant is April 1 of the calendar year following the later of the calendar year in which the Participant attains age 701/2 or the calendar year in which the Participant retires, except that benefit distributions to a 5% owner must commence by April 1 of the calendar year following the calendar year in which the Participant attains age 701/2. The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

(b)

Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(i)	If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 701/2, if later.
(ii)	If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, then distributions to the designated beneficiary

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will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(iii)	If there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
(iv)	If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 15.2(b), other than Section 15.2(b)(i), will apply as if the surviving spouse were the Participant.

For purposes of this Section 15.2(b) and Section 15.4, unless Section 15.2(b)(iv) applies, distributions are considered to begin on the Participant’s required beginning date. If Section 15.2(b)(iv) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 15.2(b)(i). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s required beginning date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 15.2(b)(i)), the date distributions are considered to begin is the date distributions actually commence.

(c) Forms of Distribution. Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with Sections 15.3 and 15.4. If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury regulations.

15.3. Required Minimum Distributions During Participant’s Lifetime.

(a) Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(i)	the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or
(ii)	if the Participant’s sole designated beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury

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regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year.

(b) Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death. Required minimum distributions will be determined under this Section 15.3 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant’s date of death.

15.4. Required Minimum Distributions After Participant’s Death.

(a) Death On or After Date Distributions Begin

(i) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated beneficiary, determined as follows:

(A)	The Participant’s remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(B)	If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.
(C)	If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, the designated beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.

(ii) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the Participant’s remaining

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life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(b) Death Before Date Distributions Begin.

(i)	Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the remaining life expectancy of the Participant’s designated beneficiary, determined as provided in Section 15.4(a).
(ii)	No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
(iii)	Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 15.2(b)(i), this Section 15.5 will apply as if the surviving spouse were the Participant.

15.5. Definitions.

(a)

Designated beneficiary. The individual who is designated as the beneficiary under Section 7.2 of the Plan and is the designated beneficiary under Section 401(a)(9) of the Internal Revenue Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations.

(b)

Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 15.2(b). The required minimum distribution for the Participant’s first distribution calendar year will be made on or before the Participant’s required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant’s required beginning date occurs, will be made on or before December 31 of that distribution calendar year.

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(c)	Life expectancy. Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations.
(d)	Participant’s account balance. The account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.
(e)	Required beginning date. The date specified in Section 15.2(a).
(f)	Election to Apply 5-Year Rule to Distributions to Designated Beneficiaries. If the Participant dies before distributions begin and there is a designated Beneficiary, distribution to the designated Beneficiary is not required to begin by the date specified in Section 15.2(b), but the Participant’s entire interest will be distributed to the designated Beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant’s death. If the Participant’s surviving spouse is the Participant’s sole designated Beneficiary and the surviving spouse dies after the Participant but before distributions to either the Participant or the surviving spouse begin, this election will apply as if the surviving spouse were the Participant. This Section 15.5 will apply to all distributions.

     IN WITNESS WHEREOF, the PHI, Inc. 401(k) Retirement Plan is adopted this 28 day of December, 2007.

PHI, INC.
 

/s/ Michael J. McCann  

Michael J. McCann 

Chief Financial Officer 

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401(k) PLAN NONDISCRIMINATION TESTING

A.1. ADP Test.

(a) Limitations on 401(k) Contributions-Qualification Requirements.

(i) At least as frequently as annually, the Committee shall determine the Actual Deferral Percentage (ADP) of 401(k) Contributions made to the Plan during the Plan Year. 401(k) Contributions must meet the ADP test of Code Section 401(k)(3). For Plan Years beginning on or after January 1, 2000, the ADP for the current Plan Year for Participants who are Highly Compensated Employees must satisfy one of the following tests:

(A)

The Plan Year’s ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior Plan Year’s ADP for Participants who were Non-Highly Compensated Employees for the prior Plan Year multiplied by 1.25; or

(B)

The Plan Year’s ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior Plan Year’s ADP for Participants who were Non-Highly Compensated Employees for the prior Plan Year multiplied by two (2.0), provided the ADP for Participants who are Highly Compensated Employees for the Plan Year does not exceed the ADP for Participants who were Non-Highly Compensated Employees for the prior Plan Year by more than two (2) percentage points.

(ii)

Current Year Testing. If elected by the Committee, the ADP tests in A and B above will be applied by comparing the current Plan Year’s ADP for Participants who are Highly Compensated Employees for each Plan Year with the current Plan Year’s ACP for Participants who are Non-Highly Compensated Employees. Once made, the Employer can elect prior year testing for a Plan Year only if the Plan has used current year testing for each of the preceding 5 Plan Years or if, as a result of a merger or acquisition described in Code Section 410(b)(6)(C)(i), the Employer maintains both a plan using prior year testing and a plan using current year testing and the change is made within the transition period described in Code Section 410(b)(6)(C)(ii).

(iii)

Actual Deferral Percentage (ADP) means, for a specified group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the amount of 401(k) Contributions actually paid over to the Trust on behalf of such Participant,

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to (2) the Participant’s compensation for such Plan Year (whether or not the Employee was a Participant for the entire Plan Year).

401(k) Contributions made on behalf of any Participant shall include any 401(k) Contributions made pursuant to the Participant’s deferral election (including Excess 401(k) Deferrals of Highly Compensated Employees) and, at the election of the Committee, any applicable Qualified Matching or Qualified Nonelective Contributions made by the Company for the Plan Year, but excluding any 401(k) Contributions that are taken into account in the Average Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of such 401(k) Contributions) and disregarding any 401(k) Contributions returned as an excess annual addition pursuant to Regulation Section 1.415-6(b)(6)(iv). For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make 401(k) Contributions shall be treated as a Participant on whose behalf no 401(k) Contributions are made.

(b) Additional Rules.

(i)	The ADP for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have 401(k) Contributions (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both if treated as 401(k) Contributions for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Code Section 401(k) that are maintained by the Company or an Affiliate, shall be determined as if such 401(k) Contributions were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all 401(k) Contributions made during the Plan Year under all such arrangements shall be aggregated.
(ii)	In the event that this Plan satisfies the requirements of Code Sections 401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ADP of Employees as if all such plans were a single plan. If more than 10 percent of the Employer’s Nonhighly Compensated Employees are involved in a plan coverage change as defined in Regulation 1.401(k)-2(c)(4), then any adjustments to the Nonhighly Compensated Employees’ ADP for the prior Plan Year will be made in accordance with such Regulation unless the Employer has elected to use the current year testing method. Plans may be aggregated in order to satisfy Code Section 401(k) of the Code only if they have the same Plan Year and use the same ADP testing method.
(iii)	For purposes of determining the ADP test, 401(k) Contributions, Qualified Matching and/or Qualified Nonelective Contributions (to the extent

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	included in the ADP test) and any other elective deferrals must be made before the last day of the twelve month period immediately following the Plan Year to which contributions relate.
(iv)	For purposes of this section, compensation means compensation as defined in Code Section 415(c)(3), but excluding all reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits. The preceding notwithstanding, compensation shall include any amount contributed by a Company on behalf of a Participant pursuant to a salary reduction agreement which is not includible in the gross income of the Participant under Code Sections 125, 132(f)(4), 401(k), 402(e)(3) or 402(h).
(v)	Notwithstanding any other provision contained in Schedule A, testing shall be performed consistently with current and/or subsequent regulations, rulings and guidance under Code Section 401(k), and the Plan hereby incorporates by reference all options relating to testing not specifically described in this document with the intent to have flexibility in satisfying the ADP test.
(vi)	The Committee shall maintain records sufficient to demonstrate satisfaction of the ADP test.
(vii)	The determination and treatment of the ADP amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury.
(viii)	A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.

(c) Excess Contributions. With respect to any Plan Year, Excess Contributions are the excess of:

(i)	The aggregate amount of contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over
(ii)	The maximum amount of such contributions permitted by the ADP test for the Highly Compensated Employee, calculated in the following manner:

(A) The 401(k) Contributions are hypothetically reduced for the HCEs with the highest actual deferral ratio (“ADR”) determined in accordance with applicable regulations to permit such HCEs’

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	percentages to equal the greater of the highest ADR allowed by the ADP test or the ADR of the HCE (or (HCEs) with the next highest ADR. If a lesser reduction is required to satisfy the ADP test, only the lesser reduction is considered.
(B)	Step (A) is repeated until the ADP test is satisfied.
(C)	The total amount of Excess Contribution is the sum of the hypothetical contribution reduction for each HCE.
	Excess Contributions shall be treated as Annual Additions under the Plan.

(d) Allocation of Excess Contributions. The dollar amount of the Excess Contribution determined in subsection (c) is distributed to the HCEs using the “dollar leveling method,” as follows:

(i)	The elective contributions of the HCE with the highest dollar amount of elective contributions are reduced by the amount that will cause that HCE’s elective contributions to equal the dollar amount of the elective contributions of the HCE with the next highest dollar amount of elective contributions.
(ii)	The amount determined in Step (i) is then distributable to the HCE with the highest dollar amount of elective contributions.
(iii)	If a lesser reduction, when added to the total dollar amount already distributable under these steps would equal the total Excess Contribution, the lesser reduction amount is distributable.
(iv)	If the total amount distributable is less than the total amount of Excess Contributions, the preceding steps are repeated until the total amount of excess contributions has been apportioned.
(v)	If the distributions equal to the total amount distributable to HCEs under the dollar leveling method, adjusted in accordance with subsection (e), are made, the ADP is treated as meeting the nondiscrimination test of Code Section 401(k)(3), regardless of whether the ADP, if recalculated after distributions, would satisfy Code Section 401(k)(3).

(e) Distribution of Excess Contributions. Notwithstanding any other provision of this Plan, Excess Contributions apportioned to a Highly Compensated Employee, plus any income and minus any loss allocable thereto, must be distributed from such Participant’s 401(k) Account no later than the last day of the Plan Year next following the Plan Year in which the Excess Contribution arose, in accordance with IRS guidance, rulings and regulations. To the extent a Highly Compensated Employee has not reached his or her Catch-Up limit under the Plan, Excess Contributions allocated to such Highly Compensated Employee are treated as

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Catch-Up Contributions and will not be treated as Excess Contributions. If such Excess Contributions (other than Catch-Up Contributions) are distributed more than 2¹/2 months after the last day of the Plan Year in which such Excess Contributions arose, a ten (10%) percent excise tax will be imposed on the Company with respect to such amounts.

(i) Determination of Income or Loss Allocable to Excess Contributions. Excess Contributions shall be adjusted for any income or loss allocable to such Excess Contributions up to the date of distribution. The income or loss allocable to a Participant’s Excess Contributions shall be determined using any of the methods set forth below:

(A)	Reasonable Method of Allocating Income. The Committee may use any reasonable method for computing the income allocable to Excess Contributions, provided that the method does not violate Code Section 401(a)(4), is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participant’s Accounts. A Plan will not fail to use a reasonable method for computing the income allocable to Excess Contributions merely because the income allocable to Excess Contributions is determined on a date that is no more than seven (7) days before the distribution.
(B)	Alternative Method of Allocating Income. The Committee may allocate income to Excess Contributions for the Plan Year by multiplying the income for the Plan Year allocable to the 401(k) Contributions and other amounts taken into account under the ADP test (including contributions made for the Plan Year), by a fraction, the numerator of which is the Excess Contributions for the Participant for the Plan Year, and the denominator of which is the sum of (1) the Account Balance attributable to 401(k) Contributions and other amounts taken into account under the ADP test as of the beginning of the Plan Year; and (2) any additional amount of such contributions made for the Plan Year.
(C)	Safe Harbor Method of Allocating Gap Period Income. The Committee may use the safe harbor method in this paragraph to determine income on Excess Contributions for the gap period. Under this safe harbor method, income on Excess Contributions for the gap period is equal to ten percent (10%) of the income allocable to Excess Contributions for the Plan Year that would be determined under paragraph (B) above, multiplied by the number of calendar months that have elapsed since the end of the Plan Year. For purposes of calculating the number of calendar months that have elapsed under the safe harbor method, a corrective distribution that is made on or before the fifteenth day of a month is treated as made on the last day of the preceding month and a

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distribution made after the fifteenth day of a month is treated as made on the last day of the month.

(D)

Alternative Method for Allocating Plan Year and Gap Period Income. The Committee may determine the income for the aggregate of the Plan Year and the gap period, by applying the alternative method provided by paragraph (B) above to the aggregate period. This is accomplished by (1) substituting the income for the Plan Year and the gap period for the income for the Plan Year, and (2) substituting the amounts taken into account under the ADP test for the Plan Year and gap period, for the amounts taken into account under the ADP test for the Plan Year in determining the fraction that is multiplied by that income.

For purposes of this subsection, the gap period means the period between the end of the Plan Year to a date determined by the Plan Administrator, which date shall not be more than seven days prior to the date of distribution.

(ii)	Suspension or Reduction of Contributions. If, prior to the end of a Plan Year, the Committee determines that a Highly Compensated Employee is likely to have Excess Contributions for the Plan Year because of the election made under Section 3.1, the Committee may authorize a suspension or reduction of 401(k) Contributions for such affected Participant as the Committee may determine. Provided further, if prior to the end of a Plan Year, the Committee determines that under the provisions of this section, a Participant is likely to have Excess Contributions for the next Plan Year because of elections made under Section 3.1, the Committee shall communicate in writing to affected Participants, a prospective limitation on the percentage of Compensation which such Participant may elect to contribute, which limitation may be prospectively changed at any time by Committee resolution.
(iii)	Testing. The ADP test shall be performed in accordance with the Code and applicable IRS guidance, rulings and regulations.
(iv)	Attributable Matching Contributions. If Excess Contributions are distributed to a Participant, no Matching Contributions will be made with respect to the Excess Contributions. If Matching Contributions have already been allocated based on such Excess Contributions, the Matching Contributions attributable to the Excess Contributions shall be forfeited upon distribution of the Excess Contributions.

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A.2. ACP Test.

(a) Limitations on Matching Contributions.

(i) Actual Contribution Percentage (ACP) Test. Matching Contributions made under the Plan must meet the Actual Contribution Percentage (ACP) test of Code Section 401(m). For Plan Years beginning on or after January 1, 2000, the ACP for the current Plan Year for eligible Participants who are Highly Compensated Employees for the Plan Year must satisfy one of the following tests:

(A)

ACP for eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior Plan Year’s ACP for Participants who were Non-Highly Compensated Employees for the prior Plan Year multiplied by 1.25; or

(B)

ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the prior Plan Year’s ACP for Participants who were Non-Highly Compensated Employees for the prior Plan Year multiplied by two (2), provided that the ACP for Participants who are Highly Compensated Employees for the Plan Year does not exceed the prior Plan Year’s ACP for Participants who were Non-highly Compensated Employees for the prior Plan Year by more than two (2) percentage points.

(ii)

Current Year Testing. If elected by the Committee, the ACP tests in (A) and (B) above will be applied by comparing the current Plan Year’s ACP for Participants who are Highly Compensated Employees for each Plan Year with the current Plan Year’s ACP for Participants who are Non-Highly Compensated Employees. The Employer can elect prior year testing for a Plan Year only if the Plan has used current year testing for each of the preceding 5 Plan Years or if, as a result of a merger or acquisition described in Code Section 410(b)(6)(C)(i), the Employer maintains both a plan using prior year testing and a plan using current year testing and the change is made within the transition period described in Code Section 410(b)(6)(C)(ii).

(iii)

Actual Contribution Percentage (ACP) means, for a specified group of eligible Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the sum of the Participant’s Matching Contributions and any Qualified Matching or Qualified Nonelective Contributions to be used in the ACP test made on behalf of such Participant for the applicable Plan Year (and disregarding any contributions returned as an excess annual addition pursuant to Regulation Section 1.415-6(b)(6)(iv)), to (2) the Participant’s compensation for such Plan Year (whether or not the Employee was a Participant for the entire Plan Year).

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For purposes of this section, an eligible Participant shall mean any Employee of the Company who is otherwise authorized under the terms of the Plan to have 401(k) Contributions or Matching Contributions allocated to his or her Account for the Plan Year (or prior Plan Year, as applicable). If 401(k) Contributions are required to receive a Matching Contribution, any Employee who would be an eligible Participant if such Employee had made a 401(k) Contribution shall be treated as an eligible Participant.

Under regulations, the Committee also may elect to use 401(k) Contributions in the ACP test so long as the ADP test is met before the 401(k) Contributions are used in the ACP test and continues to be met following the exclusion of those 401(k) Contributions that are used to meet the ACP test.

(b) Additional Rules

(i)	The ACP for any Participant who is a Highly Compensated Employee and who is eligible to have Matching Contributions and 401(k) Contributions, if applicable, allocated to his or her account under two or more plans described in Code Section 401(a) or arrangements described in Code Section 401(k) that are maintained by the Company, shall be determined as if the total of such matching contributions and before-tax contributions, if applicable, was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all Matching Contributions made during the Plan Year under all such arrangements shall be aggregated.
(ii)	In the event that this Plan satisfies the requirements of Code Sections 401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ACP of Employees as if all such plans were a single plan. If more than 10 percent of the Employer’s Nonhighly Compensated Employees are involved in a plan coverage change as defined in Regulation 1.401(m)-2(c)(4), then any adjustments to the Nonhighly Compensated Employees’ ACP for the prior Plan Year will be made in accordance with such Regulation unless the Employer has elected to use the current year testing method. Plans may be aggregated in order to satisfy Code Section 401(m) only if they have the same plan year and use the same ACP testing method.
(iii)	For purposes of the ACP test, Matching Contributions, Qualified Matching Contributions and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the applicable Plan Year.

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(iv)	For purposes of this section, compensation means compensation as defined in Section A.1(b)(iv).
(v)	Notwithstanding any other provision contained in Schedule A, testing shall be performed consistently with current and/or subsequent regulations, rulings and guidance under Code Section 401(m), and the Plan hereby incorporates by reference all options relating to testing not specifically described in this document with the intent to have flexibility in satisfying the ACP test.
(vi)	The Committee shall maintain records sufficient to demonstrate satisfaction of the ACP test.
(vii)	The ADP test may be performed using current year data for Non-Highly Compensated Employees at the election of the Committee, in accordance with Internal Revenue Service guidance, rulings and regulations.
(viii)	A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.

(c) Excess Aggregate Contributions. With respect to any Plan Year, Excess Aggregate Contributions are the excess of:

(i)	The aggregate amount of Matching Contributions, 401(k) Contributions, and if treated as matching contributions for purposes of the ACP test, Qualified Matching and/or Qualified Nonelective Contributions, taken into account in computing the ACP of Highly Compensated Employees for such Plan Year, over
(ii)	The maximum amount of such contributions permitted by the ACP test for the Highly Compensated Employee, calculated in the following manner:

(A)

Matching Contributions are hypothetically reduced for the HCEs with the highest actual contribution ratio (“ACR”) determined in accordance with applicable regulations so that such HCEs’ ACR equals the greater of the highest percentage allowed by the ACP test or the ACR of the HCE (or HCEs) with the next highest ACR. If a lesser reduction is required to satisfy the ACP test, only the lesser reduction is considered.

(B)

Step (A) is repeated until the ACP test is satisfied.

A-57

(C) The total amount of Excess Aggregate Contribution is the sum of the hypothetical contribution reductions for each HCE..

Such determination shall be made after first determining Excess Contributions pursuant to Section A.1 and then determining Excess Aggregate Contributions pursuant to this Section A.2.

(d) Allocation of Excess Aggregate Contributions. The total dollar amount of the Excess Aggregate Contribution determined in subsection (c) is distributed to the HCEs using the “dollar leveling method,” as follows:

(i)	The Excess Aggregate Contributions of the HCE with the highest dollar amount of Excess Aggregate Contributions are reduced by the amount that will cause that HCE’s Excess Aggregate Contributions to equal the dollar amount of the HCE with the next highest dollar amount of Excess Aggregate Contributions.
(ii)	The amount determined in Step (i) is then distributable to the HCE with the highest dollar amount of Excess Aggregate Contributions.
(iii)	If a lesser reduction, when added to the total dollar amount already distributable under these steps would equal the total Excess Aggregate Contribution, the lesser reduction amount is distributable.
(iv)	If the total amount distributable is less than the total amount of Excess Aggregate Contributions, the preceding steps are repeated until the total amount of Excess Aggregate Contributions has been apportioned.
(v)	If distributions equal to the total amount distributable to HCEs under the dollar leveling method, adjusted in accordance with subsection (e), are made, the ACP is treated as meeting the nondiscrimination test of Code Section 401(m)(2), regardless of whether the ACP, if recalculated after distributions, would satisfy Code Section 401(m)(2).
(vi)	For purposes of Section 401(m)(9) of the Code, if a corrective distribution of excess aggregate contributions has been made, the ACP for HCEs is deemed to be the largest amount permitted under Section 401(m)(2) of the Code.

(e) Distribution of Excess Aggregate Contributions. Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, to the extent not vested, or if not forfeitable, shall be distributed, in accordance with IRS guidance, rulings and regulations to the Highly Compensated Employees to whose Accounts Excess Aggregate Contributions were allocated, from such Participants’ Matching Accounts (and, if applicable, the Participants’ Qualified Nonelective Contributions Accounts and 401(k) Accounts) no later than the last day of the next Plan Year. If such Excess Aggregate Contributions are distributed more than 2¹/2 months

A-58

after the last day of the Plan Year in which such Excess Aggregate Contributions arose, a ten percent (10%) excise tax will be imposed on the Company maintaining the Plan with respect to such amounts.

Excess Aggregate Contributions shall be treated as Annual Additions under the Plan for Code Section 415 purposes.

(f) Determination of Income or Loss Allocable to Excess Aggregate Contributions. Excess Aggregate Contributions shall be adjusted for any income or loss allocable to such Excess Aggregate Contributions up to the date of distribution. The income or loss allocable to a Participant’s Excess Aggregate Contributions shall be determined using any of the methods set forth below:

(i)	Reasonable Method of Allocating Income. The Committee may use any reasonable method for computing the income allocable to Excess Aggregate Contributions, provided that the method does not violate Code Section 401(a)(4), is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participant’s Accounts. A Plan will not fail to use a reasonable method for computing the income allocable to Excess Aggregate Contributions merely because the income allocable to Excess Aggregate Contributions is determined on a date that is no more than seven (7) days before the distribution.
(ii)	Alternative Method of Allocating Income. The Committee may allocate income to Excess Aggregate Contributions for the Plan Year by multiplying the income for the Plan Year allocable to the Matching Contributions and other amounts taken into account under the ACP test (including contributions made for the Plan Year), by a fraction, the numerator of which is the Excess Aggregate Contributions for the Participant for the Plan Year, and the denominator of which is the sum of (1) the Account Balance attributable to Matching Contributions and other amounts taken into account under the ACP test as of the beginning of the Plan Year; and (2) any additional amount of such contributions made for the Plan Year.
(iii)	Safe Harbor Method of Allocating Gap Period Income. The Committee may use the safe harbor method in this paragraph to determine income on Excess Aggregate Contributions for the gap period. Under this safe harbor method, income on Excess Aggregate Contributions for the gap period is equal to ten percent (10%) of the income allocable to Excess Aggregate Contributions for the Plan Year that would be determined under paragraph (ii) above, multiplied by the number of calendar months that have elapsed since the end of the Plan Year. For purposes of calculating the number of calendar months that have elapsed under the safe harbor method, a corrective distribution that is made on or before the fifteenth day of a month is treated as made on the last day of the

A-59

	preceding month and a distribution made after the fifteenth day of a month is treated as made on the last day of the month.
(iv)	Alternative Method for Allocating Plan Year and Gap Period Income. The Committee may determine the income for the aggregate of the Plan Year and the gap period, by applying the alternative method provided by paragraph (ii) above to the aggregate period. This is accomplished by (1) substituting the income for the Plan Year and the gap period for the income for the Plan Year, and (2) substituting the amounts taken into account under the ACP test for the Plan Year and gap period, for the amounts taken into account under the ACP test for the Plan Year in determining the fraction that is multiplied by that income.
	For purposes of this subsection, the gap period means the period between the end of the Plan Year to a date determined by the Plan Administrator, which date shall not be more than seven days prior to the date of distribution.

(g) Testing. The ACP test shall be performed in accordance with the Code and applicable IRS guidance, rulings and regulations.

A.3. Excess 401(k) Deferrals

401(k) Contributions that are includible in a Participant’s gross income under Code Section 402(g) to the extent such Participant’s 401(k) Contributions for a taxable year exceed the dollar limitation under such Code section are “Excess 401(k) Deferrals.” Excess 401(k) Deferrals are treated as annual additions under the Plan for Code Section 415 purposes, unless such amounts are distributed on or before April 15th of the calendar year following the close of the Participant’s taxable year in which such Excess 401(k) Deferrals arose. The Participant must notify the Committee by April 1st of each year of the amount of the Excess 401(k) Deferrals to be assigned to the Plan with respect to a prior Plan Year . A Participant is deemed to notify the Committee of any Excess 401(k) Deferrals that arise if such Excess 401(k) Deferrals arise solely from 401(k) Contributions made under this Plan or any other plans of the Company.

(a)

Distribution of Excess 401(k) Deferrals. Notwithstanding any other provision of the Plan, Excess 401(k) Deferrals, plus any income and minus any loss allocable thereto, shall be distributed to the Participant on or before April 15th of the calendar year following the close of the Participant’s taxable year in which such Excess 401(k) Deferrals arose in accordance with IRS guidance, rulings and regulations. The amount to be distributed with respect to a Participant for a Plan Year is reduced by any Excess 401(k) Deferrals previously distributed to the Participant for the Plan Year.

Excess 401(k) Deferrals that are distributed after April 15th are includible in the Participant’s gross income in both the taxable year in which such Excess 401(k) Deferrals are deferred and in the taxable year in which such Excess 401(k) Deferrals are distributed.

A-60

(b) Determination of Income or Loss Allocable to Excess 401(k) Deferrals. Excess401(k) Deferrals shall be adjusted for any income or loss allocable to such Contributions up to the date of distribution. The income or loss allocable to a Participant’s Excess 401(k) Deferrals shall be determined using any of the methods set forth below:

(i)	Reasonable Method of Allocating Income. The Committee may use any reasonable method for computing the income allocable to Excess 401(k) Deferrals, provided that the method does not violate Code Section 401(a)(4), is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participant’s Accounts. A Plan will not fail to use a reasonable method for computing the income allocable to Excess 401(k) Deferrals merely because the income allocable to Excess 401(k) Deferrals is determined on a date that is no more than seven (7) days before the distribution.
(ii)	Alternative Method of Allocating Income. The Committee may allocate income to Excess 401(k) Deferrals for the Plan Year by multiplying the income for the Plan Year allocable to the 401(k) Contributions by a fraction, the numerator of which is the Excess 401(k) Deferrals for the Participant for the Plan Year, and the denominator of which is the sum of (1) the Account Balance attributable to 401(k); and (2) any additional amount of such contributions made for the Plan Year.
(iii)	Safe Harbor Method of Allocating Gap Period Income. The Committee may use the safe harbor method in this paragraph to determine income on Excess 401(k) Deferrals for the gap period. Under this safe harbor method, income on Excess 401(k) Deferrals for the gap period is equal to ten percent (10%) of the income allocable to Excess 401(k) Deferrals for the Plan Year that would be determined under paragraph (ii) above, multiplied by the number of calendar months that have elapsed since the end of the Plan Year. For purposes of calculating the number of calendar months that have elapsed under the safe harbor method, a corrective distribution that is made on or before the fifteenth day of a month is treated as made on the last day of the preceding month and a distribution made after the fifteenth day of a month is treated as made on the last day of the month.
(iv)	Alternative Method for Allocating Plan Year and Gap Period Income. The Committee may determine the income for the aggregate of the Plan Year and the gap period, by applying the alternative method provided by paragraph (ii) above to the aggregate period. This is accomplished by (1) substituting the income for the Plan Year and the gap period, for the income for the Plan Year, and (2) substituting the amounts taken into account for the Plan Year and gap period, for the amounts taken into account for the Plan Year in determining the fraction that is multiplied by that income.

A-61

For purposes of this subsection, the gap period means the period between the end of the Plan Year to a date determined by the Plan Administrator, which date shall not be more than seven days prior to the date of distribution.

(c) Attributable Matching Contributions. If Excess 401(k) Deferrals are distributed to a Participant, no Matching Contributions will be made with respect to the Excess 401(k) Deferrals. If Matching Contributions have already been allocated based on such Excess 401(k) Deferrals, the Matching Contributions attributable to the Excess 401(k) Deferrals shall be forfeited upon distribution of the Excess 401(k) Deferrals.

A.4.	Forfeitures.
	All forfeitures under this Schedule A shall be applied in accordance with Section 4.5 of the Plan.

A-62

SCHEDULE B
ELIGIBLE UNION EMPLOYEES

Agreement with Office and Professional Employees International Union, Local 108

B-1

SCHEDULE C
PARTICIPATING AFFILIATES

1.	PHI Tech Services, Inc.
2.	International Helicopter Transport, Inc.
3.	PHI Air Medical, Inc.
4.	Air Evac Services, Inc.
5.	Petroleum Helicopters International, Inc.
6.	PHI International LTD
7.	Petroleum Helicopters Angola Limitada

C-1

EX-21

Exhibit 21

PHI, Inc.
Subsidiaries of the Registrant at December 31, 2007

	PLACE OF	% OF VOTING
COMPANY	INCORPORATION	STOCK OWNED
International Helicopter Transport, Inc.	Louisiana	100%
PHI Tech Services, Inc.	Louisiana	100%
Air Evac Services, Inc.	Louisiana	100%
PHI Air Medical, Inc.	Louisiana	100%
Petroleum Helicopters International, Inc.	Louisiana	100%
Helicopter Management, LLC	Louisiana	100%
Helicopter Leasing, LLC	Louisiana	100%
HELEX, LLC	Florida	100%
Sky Leasing	Montana	100%
Petroleum Helicopters Angola Limitada	Angola	49%
PHI International, LTD	Cayman	100%
Energy Risk LTD	Bermuda	100%

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Post-Effective Amendment No. 2 to Registration Statement No. 333-02025 on Form S-8 of our reports dated March 11, 2008 relating to the consolidated financial statements and financial statement schedule of PHI, Inc. and its subsidiaries and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of PHI, Inc. for the year ended December 31, 2007.

DELOITTE & TOUCHE LLP

New Orleans, Louisiana
March 11, 2008

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER’S
CERTIFICATION UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Al A. Gonsoulin, certify that:

1.	I have reviewed this annual report on Form 10-K of PHI, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 11, 2008

By:	/s/ Al A. Gonsoulin
	Al A. Gonsoulin
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER’S
CERTIFICATION UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. McCann, certify that:

1.	I have reviewed this annual report on Form 10-K of PHI, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 11, 2008

By:	/s/ Michael J. McCann
	Michael J. McCann
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Al A. Gonsoulin, Chief Executive Officer of PHI, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,18 U.S.C. Section 1350, that:

1.	the Annual Report on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 11, 2008

By:	/s/ Al A. Gonsoulin
	Al A. Gonsoulin
	Chief Executive Officer

EX-32.2

EXHIBIT 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Michael J. McCann, Chief Financial Officer of PHI, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1.	the Annual Report on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 11, 2008

By:	/s/ Michael J. McCann
	Michael J. McCann
	Chief Financial Officer