Discovery Air Inc. announces $5.9 million in net earnings for its third quarter ended October 31, 2007



    LONDON, ON, Dec. 13 /CNW/ -

    
    FINANCIAL HIGHLIGHTS

    -   Net earnings for the quarter totalled $5.9 million or $0.05 per share
        ($0.05 diluted) compared to net earnings of $4.3 million or $0.05 per
        share ($0.05 diluted) for the same period last year.
    -   Year-to-date net earnings were $12.4 million or $0.11 per share
        ($0.11 diluted) compared to $8.2 million or $0.14 per share
        ($0.13 diluted) for the same period last year.
    -   Revenues were $41.6 million for the quarter and $101.3 million
        year-to-date compared to revenues of $22.1 million and $40.3 million
        for the comparative periods last year.
    -   Total hours flown were 25,127 for the quarter and 66,530 year-to-date
        compared to 18,049 and 34,144 hours for the comparative periods last
        year.
    -   EBITDA was $14.7 million for the quarter and $32.6 million on a
        year-to-date basis compared to $8.8 million and $16.2 million for the
        comparative periods last year (see Non-GAAP Measures).
    

    PRESIDENT'S COMMENTS

    I am again very pleased with our company's performance. This quarter, our
net earnings were $5.9 million and EBITDA was $14.7 million. For the nine
months ended October 31, 2007, net earnings totaled $12.4 million and EBITDA
was $32.6 million. Our EBITDA margin of 32% continues to lead our industry.
    These results are particularly impressive in that they only include the
results of our recent acquisitions, Walsten Air and Top Aces, for part of the
nine month period. Additionally, this year our results were negatively
impacted by a wet forest fire season and better road access in the North due
to longer ice road availability.
    We are looking forward to completing the acquisition of Discovery Mining
in our fourth quarter. This acquisition, along with the other acquisitions
completed this year, will significantly increase the size of our company and
will provide for increased revenues, EBITDA and profits in the upcoming fiscal
year.

    
    FINANCIAL HIGHLIGHTS

                                      for the                 for the
                                three months ended       nine months ended
    ------------------------------------------------- -----------------------
    (unaudited)

    ($ thousands, except      October 31  October 31  October 31  October 31
     per share amounts)          2007        2006        2007        2006
    ------------------------------------------------- -----------------------

    Results of operations
      Revenue                 $   41,612  $   22,133  $  101,263  $   40,328
      Operating expenses          26,900      13,372      68,627      24,091
                              ----------------------- -----------------------
      EBITDA (See Non-GAAP
       measures)              $   14,712  $    8,761  $   32,636  $   16,237
      Net earnings            $    5,902  $    4,265  $   12,378  $    8,227
      Earnings per
       common share:
        Basic                 $     0.05  $     0.05  $     0.11  $     0.14
        Diluted               $     0.05  $     0.05  $     0.11  $     0.13
      Total assets            $  389,523  $  183,669  $  389,523  $  183,669
    

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis (MD&A) of financial
condition and results of operations for the third quarter of fiscal 2008
should be read in conjunction with the unaudited interim consolidated
financial statements and related notes for the period ended October 31, 2007
included herein and the annual audited consolidated financial statements and
related notes for the three-month period ended January 31, 2007 as well as the
related MD&A contained in the annual report, which are available on SEDAR at
www.sedar.com.

    Business Profile

    Organization structure

    Discovery Air Inc. (the "Corporation") was incorporated on November 12,
2004. On December 21, 2004, the Corporation acquired 50% of the outstanding
shares of Hicks & Lawrence Limited (H&L) and acquired the remaining 50% of the
outstanding shares on August 16, 2005. On June 20, 2006, the Corporation
acquired 100% of the outstanding shares of Great Slave Helicopters Ltd.
(GSHL). On December 19, 2006, the Corporation acquired 100% of the outstanding
shares of Air Tindi Ltd. (ATL). On March 14, 2007, H&L purchased the wheel
division assets of Walsten Air Services (1986) Ltd. (Walsten). On August 24,
2007, the Corporation acquired 100% of the outstanding shares of Top Aces Inc.
(TAI).

    Operations

    For management purposes, the operations of the Corporation are segregated
into two operating segments: rotary wing, being the operations of GSHL; and
fixed wing, being the operations of ATL, TAI and H&L, including its Walsten
division. GSHL is a Northwest Territories-based helicopter company that
provides non-scheduled air transport services throughout northern Canada and
several of the Canadian provinces. It provides services to government and
private sector companies in areas such as resource and base mineral
exploration and production, wildlife services, forest fire suppression, oil
and gas exploration, power line construction and maintenance, aerial surveys,
tourism and flight training. ATL is a Northwest Territories-based airplane
company that provides scheduled and chartered passenger and air cargo service
to government, individuals and private sector companies in such areas as
resource and base mineral exploration, oil and gas exploration and tourism.
ATL also provides air ambulance services throughout the Northwest Territories.
TAI, a Quebec-based aviation company, is a specially qualified supplier of
airborne training services to the Department of National Defence. H&L is an
Ontario-based aviation company focused on providing air services to niche
markets in the province, primarily to the provincial government. Non-segmented
activities are classified as Corporate Support.

    
                           ---------------------
                             Discovery Air Inc.
                               Incorporated
                             November 12, 2004


                           ---------------------

    ------------------------------------------------------
     Rotary Wing                            Fixed Wing
    -------------                        -----------------

    -------------    -------------------------------------------------------
        GSHL               H&L                 ATL                 TAI
        100%               100%                100%                100%
      Acquired           Acquired            Acquired            Acquired
    June 20, 2006    50%  December 21,   December 19, 2006   August 24, 2007
    -------------          2004
                      50%  August 16,
                           2005
                     -----------------   -----------------   ---------------
    

    Seasonality and quarterly fluctuations

    There is increased demand for the aviation services of GSHL, H&L and ATL
normally commencing in the spring and continuing through to the end of the
summer. TAI revenue generating opportunities are significantly higher in the
February to June and September to November time periods. The revenues for TAI
are relatively predictable over a twelve month period but can vary greatly
from month to month depending on its customer's priorities. Furthermore, the
Corporation attempts to perform most major repairs and refurbishment during
the slower periods of revenue generating potential. As a result, the
operations of the Corporation are subject to seasonal variations. Operating
results therefore vary from quarter to quarter and results of one quarter may
not be indicative of results that may be achieved for another quarter or the
full year.

    Revenue

    The Corporation's revenue is primarily generated from helicopter and
airplane transportation services that are delivered through its subsidiaries
and are largely driven by flight hours.

    Operating Expenses

    Operating expenses consist of fixed and variable expenses including crew
and fleet costs and general and administrative expenses.
    Crew and fleet costs are the largest expense categories. Crew costs are
comprised of wages, benefits and training for pilots and maintenance
engineers. Fleet costs are comprised of aircraft lease cost and maintenance
costs, which consist of the purchase, repair and overhaul of parts, major
components and accessories. The amortization of engine and rotable component
overhauls are classified as operating expenses for financial reporting
purposes.
    General and administrative expenses are mainly comprised of wages and
benefits of administrative personnel, facility costs, travel costs, insurance
costs and other overhead expenses. These costs contain both a fixed and
variable cost component.

    Other Expenses

    Other expenses consist of financing charges and amortization expense
related to capital assets and intangible assets.

    Income Tax

    The Corporation uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future 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 basis. Future tax assets and
liabilities are measured using enacted or substantively enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the date of enactment or substantive enactment.

    Strategy and Strengths

    The Corporation's mission is to build shareholder value by creating an
alliance of profitable aviation businesses that can realize synergies,
economies of scale and deliver safe, professional air services to clients in
selected niche markets.
    The Corporation will continue to utilize its resources to develop core
competencies in the areas of safety, customer service, flight operations, and
aircraft maintenance services. In order to ensure that air services provided
to customers are safe and reliable, the Corporation adheres to Transport
Canada and, in the case of TAI, Department of National Defence approved
operational standards, policies and procedures.
    The Corporation will achieve growth by increasing the revenue of existing
operating entities through increased fleet utilization, cross selling existing
services, fleet expansion, the introduction of new services, and by
acquisition of complementary niche aviation companies.
    Aviation services are delivered by the Corporation's subsidiaries.
Discovery Air as a corporation has no day-to-day operational responsibilities.
It provides its subsidiaries with access to capital and corporate services
which include managing investor relations, group accounting, corporate legal
services, public company administration, and the development of group-wide
human resource policies. It also provides a forum through which its
subsidiaries can benefit from synergies and economies of scale as well as
sharing of best operational practices.
    The Corporation has a strong business platform in place based upon
outstanding service, a reputation for quality and safety, a loyal customer
base, a dominant position in its niche markets, a minimum 20-year successful
track record among its GSHL, ATL and H&L operating subsidiaries, an
experienced management team, and expanding market opportunities. GSHL and ATL
provide an essential service for many of its customers as access to and
movement at the majority of its customers' locations are only possible via the
assistance of aircraft. This includes the movement of people and required
supplies and equipment. TAI and H&L provide essential cost effective
outsourced aviation services to government agencies.

    Acquisitions

    Top Aces Inc.

    On August 24, 2007, the Corporation acquired 100% of the outstanding
shares of Top Aces Inc. for cash consideration of $35.0 million and 20 million
common shares. For accounting purposes, the purchase price approximates
$66.1 million. Top Aces Inc. is a specially qualified supplier of airborne
training services to the Department of National Defence. Term debt assumed at
the time of purchase was approximately $6.8 million. In order to finance a
portion of the purchase consideration, the Corporation entered into a
$33.0 million term loan agreement with a syndicate of lenders. The term loan
has a coupon rate of 9.25% per annum and the principal balance is due on
February 1, 2009. The Corporation issued 1,178,568 warrants to the syndicate
with a subscription price of $2.00 per share, expiring in July 2008. The
warrants have a calculated value of $433,000 based on an effective rate of
10.25%. The acquisition of TAI diversifies the Corporation's operating
activities both geographically and by product line. The acquisition will also
reduce the seasonality of the Corporation's revenues.

    Discovery Mining Services Ltd.

    The Corporation has entered into a Letter of Intent to acquire the issued
and outstanding shares of Discovery Mining Services Ltd. (DMS) in exchange for
$3.0 million cash, $2.0 million vendor-take-back note payable and $5.0 million
in common shares of the Corporation. Completion of the transaction is subject
to due diligence, receipt of regulatory approvals and entering into a
definitive purchase and sale agreement with the shareholders of DMS. DMS is a
leading provider of remote exploration camps, expediting, logistics and
staking services to a broad spectrum of gold, base metal, uranium, and diamond
exploration companies operating in the Northwest Territories, Nunavut, Alberta
and Saskatchewan. DMS has its head office located in Yellowknife, Northwest
Territories. The transaction is expected to close in the fourth quarter of the
current fiscal year.

    Results of operations for the three-month period ended October 31, 2007

    Overview

    For the three-month period ended October 31, 2007, the total hours flown
were 25,127 resulting in revenues of $41.6 million for the quarter compared to
18,049 hours flown and revenues of $22.1 million for the same period last
year. Net earnings of the Corporation for the quarter were $5.9 million or
$0.05 per share compared to net earnings of $4.3 million or $0.05 per share
for the same period last year. EBITDA for the quarter was $14.7 million or
$0.12 per share compared to $8.8 million or $0.10 per share for the same
period last year (see Non-GAAP Measures).

    Revenue

    Revenue for the three-month period ended October 31, 2007 totalled
$41.6 million compared to $22.1 million for the same period a year ago. Hours
flown for the quarter were 25,127 compared to 18,049 hours for the same period
a year ago. The revenue generated by ATL, TAI and Walsten, which would not
have been included in the prior year's results, was $17.0 million or 40% of
the total revenue for the recent quarter. Both the rotary wing and fixed wing
segments were negatively impacted during the recent quarter as well as the
second quarter of this fiscal year by the wet weather conditions in northern
Ontario which reduced the forest fire suppression revenue year over year.
Despite the weather set back, the Corporation was still able to generate
organic growth of $2.6 million or 12% for the quarter compared to the same
period last year due to the rotary wing segment being able to channel
resources to service the strong mining and oil and gas activities in the
Northwest Territories and Alberta.
    The Corporation's rotary wing segment, which delivers helicopter
transportation services through GSHL, flew 16,262 hours during the most recent
quarter, generating total revenue of $23.3 million compared to 14,841 hours
generating revenues of $20.2 million for the same period a year ago. In spite
of weak conditions in the Ontario forest fire suppression market, GSHL has
been able to continue at a 10% year over year growth rate in hours flown for
the quarter, largely due to the higher mining and oil and gas activities in
the Northwest Territories and Alberta. Revenues grew by 15% year over year
versus a 10% growth in hours flown due to pricing and daily minimum hour
increases instituted throughout the current year.
    The Corporation's fixed wing segment, which delivers airplane
transportation services through ATL, TAI and H&L, flew 8,865 hours generating
revenue of $18.3 million during the most recent quarter compared to
3,208 hours and $1.9 million of revenue for the same period a year ago. The
hours flown and revenue for the current quarter reflect the activity of ATL
and Walsten for the full quarter, and TAI since August 24, 2007, whereas the
prior year results only reflect H&L. The hours flown for these new operations
during the most recent quarter were 7,188 hours. The combined incremental
revenue for the recent quarter from these new acquisitions was $17.1 million,
which accounted for 93% of the fixed wing segment's total revenue. H&L, which
derives substantially all its revenue from forest fire suppression activities
in northern Ontario, reported 1,531 fewer hours flown in the recent quarter
compared to the prior year due to the wet conditions in northern Ontario this
year. This decreased revenue by $479,000 or 26% compared to the prior year.
Walsten's operation was also negatively impacted by the weak fire fighting
season and as a result had less revenue than anticipated.

    Operating Expenses

    Operating expenses totalled $26.9 million for the most recent quarter
compared to $13.4 million for the same period last year. The results for the
quarter ended October 31, 2006 only reflect the costs associated with the
operations of H&L and GSHL, as well as the cost of corporate services required
to support that smaller level of operations. The Corporation's scale of
operation and business activity has increased significantly from the prior
year and the level of costs in the current quarter reflect the inclusion of
the operating expenses incurred by GSHL, ATL, H&L, and TAI, since it was
acquired on August 24, 2007, as well as the increased cost of corporate
services required to support a much larger scale of business operations. The
Corporate Services group significantly increased its rate of expenses year
over year with increased salary, travel and investor relations costs incurred
to support the business operations acquired. The combined total for these
corporate support costs related to this quarter was $559,000 compared to
$269,000 for the same period a year ago.
    In keeping with the Corporation's vision to align the interest of
employees and shareholders, the Corporation granted 3 million stock options to
employees in the nine month period of the current year which resulted in a
stock option expense of $377,000 in the current quarter directly related to
those options granted. Total stock option expense for the quarter was $499,000
compared to $159,000 last year.

    EBITDA (see Non-GAAP Measures)

    The EBITDA for the quarter was $14.7 million compared to $8.8 million for
the same period a year ago. The EBITDA as a percentage of revenue for the
quarter was 35% compared to 40% EBITDA for the same period a year ago. The
increase in EBITDA is directly attributable to the operations of ATL, TAI and
Walsten which were not part of the prior year's results for this quarter. The
EBITDA as a percentage of revenue in the current year was lower primarily due
to the impact of H&L's decrease in revenue resulting from the wet weather
conditions in northern Ontario.
    The rotary wing segment had EBITDA of $10.0 million compared to
$9.0 million a year ago. The EBITDA as a percentage of revenue was 43% for the
quarter compared to 44% for the same period a year ago. The rotary segment was
able to maintain a similar percentage as the prior year despite a weak Ontario
forest fire market which uses high margin medium lift helicopters due to their
ability to improve operational efficiency. This was achieved in large part by
lowering the fixed cost in relation to revenue without diminishing the high
level of service expected by their customers. The rotary segment also
increased their rate and daily minimum flight hours throughout the current
year.
    The fixed wing segment had EBITDA of $6.1 million compared to $523,000 a
year ago. The EBITDA as a percentage of revenue was 33% for the quarter
compared to 28% for the same period a year ago. The fixed wing segment's
increase in EBITDA and EBITDA as a percentage of revenue over the prior period
was due to the addition of ATL, TAI and Walsten in the current year's
operational results in the quarter. For the quarter the EBITDA from these
operations was $5.7 million, representing 93% of the total fixed wing EBITDA
for the quarter. The EBITDA as a percentage of revenue from these operations
combined was 34%.

    Other Expenses

    Financing Charges

    Financing charges were $2.8 million for the quarter compared to $929,000
for the same period last year. The increased finance charges reflect a higher
level of debt year over year to fund acquisitions and capital expenditures.

    Amortization

    Total amortization expense for the current quarter was $2.6 million (2006
- $1.3 million) of which $1.7 million (2006 - $874,000) related to
amortization of buildings and equipment and $860,000 (2006 - $452,000) related
to the amortization of intangible assets. The amortization of buildings and
equipment has increased due to assets acquired as a result of acquisitions as
well as capital expenditures. The amortization of intangible assets relates to
the portion of the purchase price for acquired companies attributable to
certain identifiable intangible assets such as the estimated fair market value
of customer relationships. The value attributable to customer relationships is
amortized over a predetermined period. There was a significant increase in
identifiable intangible assets year over year due to the acquisition of ATL
and TAI. The portion of the ATL purchase price attributed to customer
relationships was $5.2 million and the TAI purchase price estimated to be
attributable to customer relationships is $18.2 million. The amount
attributable to intangible assets that need to be amortized was considerably
higher for TAI than GSHL and ATL due to TAI being reliant upon a single
customer rather than a broad spectrum of customer relationships.

    Income Taxes

    The Corporation recorded an income tax provision of $3.3 million for the
quarter. The Corporation's statutory rate approximates 34%; however, due to
non-deductible charges related to stock-based compensation, the income tax
provision reflects a higher effective tax rate. For the current quarter the
effective tax rate was 36%.

    Results of operations for the nine-month period ended October 31, 2007

    Overview

    Net earnings of the Corporation on a year-to-date basis were
$12.4 million or $0.11 per share compared to net earnings of $8.2 million or
$0.14 per share for the same period last year. Year-to-date EBITDA was
$32.6 million or $0.28 per share compared to $16.2 million or $0.28 per share
for the same period last year (see Non-GAAP Measures). In comparing the
current year-to-date earnings per share performance of the Corporation to the
prior period, it is important to note that the results for the nine-month
period ended October 31, 2006 only included GSHL results for the period from
June 20, 2006 to October 31, 2006. GSHL has seasonal business operations and
this period represents the most active period for flight hours and revenue
generation. For the 12 months ended January 31, 2007, 61% of GSHL's flight
hours were recorded in the 4 month period from June to September 2006. The
4 month period from February to May 2006 only represented 25% of the flight
hours for these 12 months.

    Revenue

    Revenue on a year-to-date basis was $101.3 million compared to
$40.3 million for the same period a year ago. Hours flown on a year-to-date
basis were 66,530 compared to 34,144 hours for the same period a year ago.
Approximately $57.7 million or 57% of the current revenue can be attributed to
revenues generated from companies acquired over the last year. The fixed wing
segment's revenue levels were impacted in the first quarter of this fiscal
year by the unusually favourable ice road conditions that resulted in a higher
than normal number of truckloads being shipped over the ice roads. This led to
lower demand for Dash-7 aircraft in the first quarter year over year. As well,
fixed wing revenues were impacted in the first quarter by an hour threshold
that was triggered in one of ATL's long term contracts that led to a
significant reduction in the customer's rate for flight services for a two
month period. The impact of these events in the first quarter reduced expected
revenues by an estimated $858,000. Both the rotary wing and fixed wing
segments were negatively impacted by the wet weather conditions in Ontario
which reduced the fire detection and suppression revenue in the second and
third quarters of this fiscal year. It is estimated that the wet weather
conditions in Ontario resulted in $2.2 million in less revenue than a year
ago. However, in spite of environmental and other factors that had the effect
of hampering the ability of the Corporation to grow its revenues during the
first three quarters of this year, the Corporation was still able to generate
organic growth of $3.3 million or 8% compared to the same period last year due
to the rotary wing segment being able to channel resources to service the
strong mining and oil and gas activities in the Northwest Territories and
Alberta.
    On a year-to-date basis the rotary wing segment flew 43,375 hours
generating revenues of $61.1 million compared to 25,675 hours generating
revenues of $34.5 million in the prior year. The comparative year-to-date
result represents an abbreviated reporting period as GSHL was acquired by the
Corporation on June 20, 2006. The rotary wing segment has been able to
maintain an 11% year over year increase in flight hours for the nine month
period ended October 31 in spite of weak conditions in the Ontario forest fire
suppression during the second and third quarter of this year, which resulted
in an estimated $1.2 million decrease in revenue compared to prior year.
    Year-to-date, the fixed wing segment flew 23,155 hours generating
revenues of $40.1 million compared to 8,469 hours flown and revenues of
$5.8 million in the comparable period last year. The current year-to-date
results reflect the activity of ATL and H&L for three quarters, Walsten since
being acquired on March 14, 2007 and TAI since being acquired on August 24,
2007. With the exception of H&L these operations were not owned by the
Corporation during the same period a year ago and therefore were not included
in the nine month results for that period. The combined incremental revenue
from these new acquisitions for the current year-to-date was $35.3 million
which accounts for 88% of the fixed wing segment's total revenue for the
recent nine month period. H&L, which derives substantially all its revenue
from forest fire suppression activities in northern Ontario, reported lower
revenue due to the wet conditions in northern Ontario this year. The impact of
the wet weather conditions resulted in 3,490 fewer hours flown for H&L
compared to prior year which had the effect of reducing revenues by an
estimated $1.0 million or 18% from prior year. The Walsten operation was also
negatively impacted by the weak fire fighting season and resulted in less
revenue than anticipated.

    Operating Expenses

    On a year-to-date basis operating expenses totalled $68.6 million
compared to $24.1 million for the same period last year. The results for the
year-to-date ended October 31, 2006 only reflect the costs associated with the
operations of H&L for the full reporting period and GSHL, since its
acquisition on June 20, 2006, as well as the cost of corporate services
required to support these operations. The Corporation's scale of operation and
business activity has increased significantly from the prior year and the
level of costs in the current year-to-date reflect the inclusion of the
operating expenses incurred by GSHL, ATL, TAI and Walsten as well as the
increased cost of corporate services required to support a much larger scale
of business operations. The Corporate Services group increased its salary,
travel and investor relations costs over the last year to support the business
operations acquired. The combined total for these corporate support costs was
$1.8 million compared to $826,000 for the same period a year ago.
    In keeping with the Corporation's vision to align the interest of
employees and shareholders, the Corporation granted 3 million stock options to
employees in the nine month period of the current year which resulted in a
stock option expense of $1.2 million on a year-to-date basis directly related
to those options granted. While most of the increase in operating expenses was
directly attributable and proportionate to the increased operations, the
Corporation incurred a number of non-recurring expenses which were primarily
reflected in the Corporate Services segment. The Corporation changed its year
end from October 31 to January 31 and the associated cost of preparing the
annual report and hosting a second annual meeting was approximately $144,000.
Corporate Services also incurred one-time costs related to hiring and the set-
up of corporate offices in its year-to-date expenses.

    EBITDA (see Non-GAAP Measures)

    The EBITDA year-to-date was $32.6 million compared to $16.2 million for
the same period a year ago. The EBITDA as a percentage of revenue year-to-date
was 32% compared to 40% for the same period a year ago. The increase in
current year-to-date EBITDA over the prior year was due to the inclusion of
the full year-to-date results of ATL and GSHL, Walsten since being acquired on
March 14, 2007 and TAI since being acquired on August 24, 2007. The prior
year's results only reflect the full year-to-date results of H&L and GSHL
since being acquired on June 20, 2006. As noted above in the revenue
discussion, the fixed wing segment was negatively impacted in the first
quarter by an unusually long ice road season and the threshold hours being met
in a long term contract which allowed for a lower rate for flight services for
a two month period in the quarter. The rotary and fixed wing segments were
again impacted in the second and third quarters by weather related conditions.
Due to the high fixed cost component in both segments, the lost revenue from
these events would directly impact the EBITDA. The lower EBITDA as a
percentage of revenue in the current year was due to the inclusion of GSHL's
seasonally lower margin results for the period up to June 20 in the current
fiscal period as well as H&L's strong performance in the prior year compared
to this year's results.
    The rotary wing segment had year-to-date EBITDA of $23.7 million compared
to $15.3 million in the same period a year ago. The EBITDA as a percentage of
revenue was 39% year-to-date compared to 44% in the same period a year ago. As
discussed previously, the consolidated results for the nine months ended
October 31, 2006 only included results for GSHL for the period from June 20,
2006 to October 31, 2006. This period is a much more profitable period than
the period from February 1 to May 31 of each year. For example, the EBITDA of
the rotary wing division for Q1 this year was only 381,000 or 4% as a
percentage of revenue. It is therefore difficult to make a comparison of year
over year results as a percent of revenues for the rotary wing division.
    The fixed wing segment reported year-to-date EBITDA of $12.8 million
compared to $2.6 million a year ago. The EBITDA as a percentage of revenue was
32% year-to-date compared to 46% for the same period a year ago. The year over
year increase in EBITDA was due to the addition of ATL, Walsten since
March 14, 2007 and TAI since August 24, 2007. The total EBITDA from these
operations was $11.4 million which represents 89% of total EBITDA reported
from the fixed wing segment. The EBITDA from H&L was $1.7 million which was
down $1.0 or 37% from prior year due to the wet weather in northern Ontario.
The EBITDA for ATL was also negatively impacted in the first quarter due to
the favourable ice road conditions and the threshold hours on a long term
contract being met which allowed for a lower rate for flight services, as
noted above in the revenue discussion. The lower EBITDA as a percentage of
revenue over the prior period was primarily due to the impact of the wet
forest fire season on H&L's revenue compared to the prior year. H&L was unable
to adjust its committed fixed costs in response to the unfavourable market
conditions. Therefore, revenue shortfalls directly reduced the EBITDA.

    Other Expenses

    Financing Charges

    The financing charges on a year-to-date basis were $6.8 million for the
first nine months of this year compared to $1.5 million for the same period
last year. As with the results for the three-month period, the increased
finance costs are reflective of the increased debt levels the Corporation has
assumed in growing the business through acquisitions and investing in new
equipment.

    Amortization

    Amortization expense for the first nine months of this year was
$6.4 million (2006 - $1.9 million) with $4.5 million (2006 - $1.4 million)
related to the amortization of buildings and equipment and $1.9 million (2006
- $474,000) related to the amortization of intangible assets.
    The increased amortization expense related to buildings and equipment
reflects the Corporation's acquisition activities as well as the amortization
associated with capital expenditures made. At the time of acquisition, the
Corporation records land and buildings at their fair market value, not the net
book value that was in existence for the acquired company immediately prior to
acquisition. Amortization is recorded on the higher fair market value post
acquisition.
    The increased amortization expense related to intangibles reflects the
Corporation's year over year growth through acquisitions. For accounting
purposes the Corporation amortizes the fair market value of identifiable
intangible assets such as customer relationships. In the current year the
level of amortization on intangible assets has increased due to a full
12 months being recorded for GSHL and amortization being recorded on the
identifiable intangible assets acquired on the ATL and TAI acquisitions. These
assets may have a life that extends beyond this amortization period.

    Income Taxes

    The Corporation recorded an income tax provision of $6.8 million year-to-
date. The Corporation's statutory rate approximates 34%. The non-deductible
charges related to stock-based compensation and other permanent differences
between accounting and tax expense, results in an effective tax rate that is
approximately 3% higher than the statutory rate on a year-to-date basis. A
reduction in the income tax provision in the second quarter related to an
adjustment in the future income tax liabilities for the enacted reduction in
future federal tax rates reduced the year-to-date effective tax rate by 2%.
The net effective tax rate factoring these adjustments is 35% on a year-to-
date basis.

    Liquidity and Working Capital

    Cash resources at October 31, 2007 were $15.1 million compared to
$7.5 million a year ago and $17.6 million as at January 31, 2007. At
October 31, 2007, the Corporation had working capital of $21.5 million
compared to $9.8 million a year ago and $16.5 million at January 31, 2007. The
improvement in working capital from a year ago was due primarily to the
acquisition and inclusion of the operations of ATL and TAI, net cash generated
by the Corporation's business activities, and funds raised for working capital
purposes from public and private equity and convertible debenture offerings.
Due to the seasonality of its business operations, the Corporation's cash
balances fluctuate in relation to seasonal revenue patterns.
    Accounts receivable at October 31, 2007, were $28.7 million compared to
$12.0 million at January 31, 2007, and $15.0 million a year ago. The increase
in accounts receivable from January 31, 2007 reflects the seasonality of the
subsidiaries' operations and the inclusion of Walsten and TAI. The increase in
accounts receivable over the prior year are due primarily to the inclusion of
the operations of ATL and TAI which had a balance of $7.5 million and
$3.2 million respectively, as at October 31, 2007. Inventory, consisting of
parts and supplies, totalled $13.0 million at October 31, 2007, compared to
$9.5 million at January 31, 2007 and $7.0 million a year ago. The increase
over the prior year was due primarily to the inclusion of the inventory from
the operations of ATL and TAI which had a balance of $3.0 million and
$2.1 respectively, as at October 31, 2007.
    Accounts payable and accrued liabilities were $14.3 million at
October 31, 2007 compared to $7.8 million at January 31, 2007 and $4.7 million
a year ago. The increase from the prior year was due to the inclusion of ATL
and TAI which combined account for $8.5 million to the total accounts payable
and accrued liabilities in the year period.
    The Corporation believes it has sufficient working capital to meet its
operating requirements based on its existing working capital position and cash
generated from operations. In addition, the Corporation has various working
capital credit facilities available as a source for any short-term financing
requirements.

    Capital Resources

    Land, buildings and equipment at October 31, 2007 totalled $129.7 million
compared to $97.8 million at January 31, 2007 and $50.6 million a year ago
with the increase from the prior year due in large part to the inclusion of
land, buildings and equipment of ATL, TAI and Walsten which totalled
$50.3 million, $16.9 million and $4.4 million respectively. The Corporation
also purchased $2.9 million of capital assets during the most recent quarter
and $19.7 million year-to-date, comprised mostly of new aircraft and the
investment in the engine and rotable component overhauls. Goodwill and other
intangibles was $197.2 million at October 31, 2007 compared to $140.9 million
at January 31, 2007 and $102.1 million a year ago. The increase from a year
ago was due to goodwill and other intangibles recorded on the acquisition of
ATL, TAI and Walsten.

    Debt Financing

    Debt at October 31, 2007, totalled $135.0 million compared to
$89.0 million as at January 31, 2007 and $44.4 million for the comparable
period a year ago. The increase in debt from last year was a result of the
inclusion of the debt of ATL, TAI, Walsten, the issuance of convertible
debentures by the Corporation in December 2006 to fund the purchase of ATL and
the issuance of debt to finance the purchase of TAI in August 2007. On a year-
to-date basis, the Corporation incurred additional debt of $33.0 million to
finance the purchase of TAI's shares, $11.5 million to fund the purchase of
new aircraft, $6.8 million of assumed debt related to TAI and $4.2 million to
fund the acquisition of Walsten. The Corporation made $9.1 million in
scheduled debt repayment in the same period.

    Shareholders' Equity

    Shareholders' equity at October 31, 2007, totalled $185.2 million
compared to $107.6 million a year ago with the increase attributable to the
retention of earnings, the issuance of Class A common shares on the
acquisition of ATL and TAI, the exercise of warrants, the fair value
attributable to the conversion feature on the convertible debentures and the
fair value of options granted, and the fair value attributable to the warrants
issued. At October 31, 2007, the Corporation had 130,235,665 Class A common
shares outstanding and 684,354 Class B common shares outstanding compared to
88,339,397 Class A common shares outstanding and nil Class B common shares
outstanding at the same time last year. The detail of the 41.9 million
increase in Class A common share issues during the most recent 12 month period
is as follows: the issue of 20.0 million Class A common shares as partial
consideration for the acquisition of ATL, the issue of 19.3 million Class A
common shares as partial consideration for the acquisition of TAI, 2.6 million
Class A common shares issued on the exercise of warrants and 20,000 Class A
common shares issued on the exercise of options. The Corporation issued
684,384 Class B common shares in the most recent quarter as partial
consideration for the acquisition of TAI.
    There were 6,604,488 common share purchase warrants outstanding at
October 31, 2007. The holders of 5,425,920 warrants are entitled to subscribe
for one Class A common share for every warrant held at a subscription price of
$1.75 per share; these warrants expire in December 2007. The holders of
1,178,568 warrants are entitled to subscribe for one Class A share for every
warrant held at a subscription price of $2.00 per share; these warrants expire
in July 2008.
    There were 6,912,350 common share options outstanding at October 31,
2007. For the three month period ended October 31, 2007, 178,350 common share
options were granted and 2,989,400 common share options were granted on a
year- to-date basis. 44,666 common share options were forfeited in the current
quarter and 74,816 on a year-to-date basis. 2,234 stock options were cancelled
in the quarter and on a year-to-date basis. There were no stock options
exercised in the quarter, 20,000 stock options were exercised on a year-to-
date basis. Salary expense and an addition to contributed surplus of $499,000
has been recognized in the current quarter and $1.6M on a year-to-date basis
in the interim consolidated financial statements relating to these options.
    On March 27, 2006, the Corporation was continued under the Canada
Business Corporations Act. At the time of the continuance, its share structure
was amended to authorize the issuance of an unlimited number of Class A common
voting shares and an unlimited number of Class B common variable voting
shares. Each issued and outstanding common voting share as at March 27, 2006,
was converted into a Class A common voting share on a one for one basis.
    Additional information with respect to share capital is contained in
Note 6 to the interim consolidated financial statements.

    Updated Share Information

    At December 12, 2007, there were 130,235,665 Class A common shares
outstanding and 684,354 Class B common shares outstanding.

    Accounting Estimates

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the years.
Significant items subject to such estimates and assumptions include the
amortization of buildings and equipment and the recoverability of land,
buildings and equipment, intangible assets and goodwill. Actual results could
differ from those estimates.

    Off-Balance Sheet Arrangements

    The Corporation did not have any material off-balance sheet arrangements
other than those disclosed in the Corporations' audited consolidated financial
statements as at January 31, 2007 and note 10 to the October 31, 2007
unaudited interim consolidated financial statements.

    Related Party Transactions

    At October 31, 2007, the Corporation had total indebtedness, including
accrued interest, of $18.2 million (2006 - $16.6 million) owing primarily to
officers and directors of the Corporation or its subsidiaries who were former
owners of the subsidiaries. Interest expense on this debt for the current
quarter totalled $304,000 (2006 - $435,000) and $880,000 (2006 - $435,000) on
a year-to-date basis.

    Effectiveness of Disclosure Controls and Procedures

    The Corporation's President & CEO and CFO have assessed the effectiveness
of the disclosure procedures and controls used for the consolidated financial
statements and Management's Discussion and Analysis as at October 31, 2007.
Their assessment led them to conclude that the disclosure procedures and
controls used for the financial statements and Management's Discussion and
Analysis were effective.
    The President & CEO and CFO are responsible for designing internal
control over financial reporting (ICFR), or causing them to be designed under
their supervision to provide reasonable assurance regarding the reliability of
the Corporation's financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian GAAP. There were
no changes in the Corporation's ICFR during the most recent interim period
that have materially affected, or are reasonably likely to materially affect,
the Corporation's ICFR.

    Risk Factors

    The Corporation is subject to a number of risks and uncertainties and is
affected by a number of factors outside of the control of its management.
Details are provided in the "Risk Factors" section of the Corporation's Annual
Information Form dated April 30, 2007, which can be found on SEDAR at
www.sedar.com.
    TAI was acquired by the Corporation on August 24, 2007. As an operational
aviation company, TAI is, in general, subject to the same industry and
business risks as the Corporation's other subsidiaries that were described in
the Corporation's Annual Information Form dated April 30, 2007. There are some
additional risks over and above those described in the April 30, 2007 Annual
Information Form which are described below.

    Industry and Government Regulations:

    As a commercial air operation, TAI is subject to the same level of
regulatory scrutiny as the Corporation's other subsidiaries. However, due to
the military nature of Top Aces operation, TAI is subject to additional
government regulations, such as Canadian controlled goods regulations, United
States International Traffic in Arms Regulations, and similar foreign
regulations. To date, Top Aces has been in compliance with all such laws and
regulations, and has received all necessary permits, however, there can be no
guarantee that Top Aces will receive all necessary permits and be in
compliance with all regulations in the future.
    In addition, TAI is also subject to an additional level of regulatory
approval over and above the Transport Canada regulations described in the
April 30, 2007 Annual Information Form, that being Department of National
Defence Airworthiness. TAI is regularly audited by Department of National
Defense Operational and Technical Airworthiness authorities. To date, TAI is
in compliance with all technical and operational airworthiness requirements,
but there can be no guarantee that they will pass all audits in the future.

    Reliance on a single customer:

    TAI's revenue is derived from Standing Offers to provide airborne
training services to the Department of National Defence. These Standing Offers
currently expire in March 2010. The government is not obligated to call up any
TAI services under these Standing Offers and may cancel these Standing Offers
at their convenience. Due to the essential nature of this military training,
management does not believe it likely that the standing offers will be
terminated or that there will be any substantial reduction in service required
by the Department of National Defence. In addition, TAI is the only supplier
with approved airworthiness clearances under these Standing Offers. It is
anticipated that these services will be put out for tender via a Request for
Proposal to ensure continuation of the airborne training services beyond March
2010.

    Insurance:

    As an airborne service provider, TAI is subject to the same inherent
risks associated with the Corporation's other subsidiaries, and to additional
risks associated with the military nature of the training services it
provides. As a result, TAI is subject to the same Insurance risks as the
Corporation's other subsidiaries.

    Outlook

    Due to factors mentioned earlier in this report that have had an impact
on the level of revenues and expenses for the current fiscal period to date,
the Corporation is revising its revenue outlook to $121 million and its EBITDA
(see Non-GAAP Measures) outlook to $31 million.

    Forward-Looking Statements

    The statements in this management's discussion and analysis which relate
to the future are forward-looking statements. By their very nature, forward-
looking statements involve inherent risks and uncertainties, both general and
specific, and risks exist that predictions, forecasts, projections and other
forward-looking statements will not be achieved. Readers are cautioned not to
place undue reliance on these forward-looking statements as a number of
important factors could cause actual results to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not limited to, our
ability to secure operating contracts; the strength of the Canadian economy in
general and the strength of the local economies within Canada in which we
conduct operations; the effects of changes in interest rates; the effects of
competition in the markets in which we operate; inflation; capital market
fluctuations; the impact of changes in the laws and regulations regulating
aviation services; changes in tax laws; technological changes; unexpected
judicial or regulatory proceedings; weather conditions in the geographical
regions in which we operate; and our anticipation of and success in managing
the risks implicated by the foregoing.
    The foregoing list of important factors is not exhaustive. When relying
on forward-looking statements to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential
events. There is no undertaking to update any forward-looking statement that
is contained in this management's discussion and analysis or made from time to
time by the Corporation.

    Non-GAAP Measures

    References to "EBITDA" are to earnings before interest, income taxes,
depreciation and amortization (except for amortization of rotable and
overhauled components, which are considered operating expenses), gain on
disposal of land, building and equipment, and excludes non-controlling
interest. The Corporation uses EBITDA as supplemental financial measures of
its operational performance. Management believes EBITDA to be an important
measure as it excludes the effects of items which primarily reflect the impact
of long-term investment decisions rather than the performance of the
Corporation's day-to-day operations. Management believes this measurement is
useful to measure a company's ability to service debt and to meet other
payment obligations or as a valuation measurement.

    
    The following is a reconciliation of EBITDA to net earnings:

                                       for the                for the
                                 three months ended      nine months ended
                              ----------------------- -----------------------
                              October 31  October 31  October 31  October 31
    (thousands of dollars)       2007        2006        2007        2006
    ------------------------------------------------- -----------------------
                              (unaudited) (unaudited) (unaudited) (unaudited)

    Earnings before non-
     controlling interest     $    6,024  $    4,465  $   12,642  $    8,459
    Income taxes                   3,327       2,041       6,826       4,464
    Financing charges              2,771         929       6,818       1,455
    Amortization                   2,590       1,326       6,350       1,859
    ------------------------------------------------- -----------------------

    EBITDA                    $   14,712  $    8,761  $   32,636  $   16,237
    ------------------------------------------------- -----------------------


    Segmented breakdown of EBITDA

    (thousands of dollars)     for the three months ended October 31, 2007
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss)       $    8,926  $    4,542  $   (1,346) $    5,902
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization                   1,028       1,554           8       2,590
    Financing costs                    -           -           -       2,771
    Income taxes                       -           -           -       3,327
    Minority interest                  -           -           -         122
    -------------------------------------------------------------------------
    EBITDA                    $    9,954  $    6,096  $   (1,338) $   14,712
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (thousands of dollars)     for the three months ended October 31, 2006
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss)       $    7,790  $      411  $     (766) $    4,265
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization                   1,214         112           -       1,326
    Financing costs                    -           -           -         929
    Income taxes                       -           -           -       2,041
    Minority interest                  -           -           -         200
    -------------------------------------------------------------------------
    EBITDA                    $    9,004  $      523  $     (766) $    8,761
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (thousands of dollars)      for the nine months ended October 31, 2007
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss)       $   20,907  $    9,245  $   (3,866) $   12,378
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization                   2,801       3,528          21       6,350
    Financing costs                    -           -           -       6,818
    Income taxes                       -           -           -       6,826
    Minority interest                  -           -           -         264
    -------------------------------------------------------------------------
    EBITDA                    $   23,708  $   12,773  $   (3,845) $   32,636
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    (thousands of dollars)      for the nine months ended October 31, 2006
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss)       $   13,778  $    2,329  $   (1,729) $    8,227
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Amortization                   1,555         304           -       1,859
    Financing costs                    -           -           -       1,455
    Income taxes                       -           -           -       4,464
    Minority interest                  -           -           -         232
    -------------------------------------------------------------------------
    EBITDA                    $   15,333  $    2,633  $   (1,729) $   16,237
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Summary of Quarterly Results

    (thousands of
     dollars except
     per share amounts)                 2008               2007(*)
    ----------------------- ----------------------------- ---------
                               Q3        Q2        Q1        Q1
                             Oct 31    Jul 31    Apr 30    Jan 31

    Results of operations:
    Total revenue           $ 41,612  $ 43,583  $ 16,067  $  7,114
    Operating expenses        26,900    24,855    16,872    12,412
                            ----------------------------- ---------
    EBITDA                    14,712    18,728      (805)   (5,298)

    Amortization               2,590     1,432     2,328     1,510
    Financing costs            2,771     2,127     1,919     1,366

    Income (loss) before
     income taxes and
     non-controlling
     interest                  9,351    15,169    (5,052)   (8,174)
    Income tax provision
     (recovery)                3,327     4,965    (1,466)   (3,616)
    Non-controlling
     interest                    122       147        (5)      (47)

                            ----------------------------- ---------
    Net earnings (loss)     $  5,902  $ 10,057  $ (3,581) $ (4,511)
                            ----------------------------- ---------
    Earnings per share
      -basic                $   0.05  $   0.09  $  (0.03) $  (0.05)
      -diluted              $   0.05  $   0.09  $  (0.03) $  (0.05)


    (thousands of
     dollars except
     per share amounts)                      2006                     2005
    ----------------------- --------------------------------------- ---------
                               Q4        Q3        Q2        Q1        Q4
                             Oct 31    Jul 31    Apr 30    Jan 31    Oct 31

    Results of operations:
    Total revenue           $ 22,133  $ 18,111  $     84  $     22  $  1,525
    Operating expenses        13,372    10,110       609       597     1,171
                            --------------------------------------- ---------
    EBITDA                     8,761     8,001      (525)     (575)      354

    Amortization               1,326       493        40        40        76
    Financing costs              929       423       103        98       148

    Income (loss) before
     income taxes and
     non-controlling
     interest                  6,506     7,085      (668)     (713)      130
    Income tax provision
     (recovery)                2,041     2,643      (220)     (176)       41
    Non-controlling
     interest                    200        32         -         -        72

                            --------------------------------------- ---------
    Net earnings (loss)     $  4,265  $  4,410  $   (448) $   (537) $     17
                            --------------------------------------- ---------
    Earnings per share
      -basic                $   0.05  $   0.08  $  (0.02) $  (0.02) $      -
      -diluted              $   0.05  $   0.07  $  (0.02) $  (0.02) $      -

    (*) The Corporation changed its year end from October 31 to January 31

    Dated: December 12, 2007
    


    Discovery Air's mission is to build shareholder value by creating an
alliance of profitable aviation businesses that can realize synergies,
economies of scale and deliver safe, professional air services to clients in
selected niche markets.
    Discovery Air's Class A common shares trade on the Toronto Stock Exchange
under the symbol DA.A.
    Discovery Air's Debentures trade on the Toronto Stock Exchange under the
symbol DA.DB.


    
    DISCOVERY AIR INC.
    Consolidated Balance Sheets
    (thousands of dollars)

                                        October 31   January 31   October 31
                                           2007         2007         2006
                                       ------------ ------------ ------------
                                        (unaudited)   (audited)    (audited)

    Assets
    Current assets:
      Cash                             $    15,080  $    17,634  $     7,497
      Accounts receivable                   28,677       12,028       14,950
      Inventory                             12,983        9,532        7,018
      Prepaid expenses and other             5,844        1,817        1,521
                                       ------------ ------------ ------------
                                            62,584       41,011       30,986
                                       ------------ ------------ ------------

    Land, buildings and equipment          129,685       97,840       50,607

    Intangible assets                       43,931       26,754       19,497

    Goodwill                               153,323      114,159       82,579

                                       ------------ ------------ ------------
                                       $   389,523  $   279,764  $   183,669
                                       ------------ ------------ ------------
                                       ------------ ------------ ------------

    Liabilities and Shareholders' Equity
    Current liabilities:
      Accounts payable and accrued
       liabilities                     $    14,256  $     7,842  $     4,713
      Income taxes payable                   6,359        2,435        5,259
      Current portion of long-term
       debt (note 5)                        20,478       14,218       11,195
                                       ------------ ------------ ------------
                                            41,093       24,495       21,167
                                       ------------ ------------ ------------

    Long-term debt (note 5)                114,547       74,729       33,221

    Future income taxes                     30,771       22,837       11,861

    Non-controlling interest                 1,845        1,633        1,646

    Shareholders' equity
      Share capital (note 6)               185,178      152,359      107,552
      Retained earnings                     16,089        3,711        8,222
                                       ------------ ------------ ------------
                                           201,267      156,070      115,774
                                       ------------ ------------ ------------

                                       ------------ ------------ ------------
                                       $   389,523  $   279,764  $   183,669
                                       ------------ ------------ ------------
                                       ------------ ------------ ------------

    See accompanying notes to consolidated financial statements.



    DISCOVERY AIR INC.
    Consolidated Statements of Earnings
    (thousands of dollars)

                                   for the                   for the
                             three months ended         nine months ended
                          ------------------------- -------------------------
                           October 31   October 31   October 31   October 31
                              2007         2006         2007         2006
                          ------------------------- -------------------------
                           (unaudited)  (unaudited)  (unaudited)  (unaudited)

    Revenue               $    41,612  $    22,133  $   101,263  $    40,328
    Operating expenses         26,900       13,372       68,627       24,091
                          ------------------------- -------------------------
                               14,712        8,761       32,636       16,237

    Financing charges           2,771          929        6,818        1,455
    Amortization of
     buildings and
     equipment                  1,730          874        4,484        1,385
    Amortization of
     intangible assets            860          452        1,866          474
                          ------------------------- -------------------------
                                5,361        2,255       13,168        3,314
                          ------------------------- -------------------------
    Earnings before
     income taxes and non-
     controlling interest       9,351        6,506       19,468       12,923

    Income taxes (note 9)       3,327        2,041        6,826        4,464

    Earnings before non-
     controlling interest       6,024        4,465       12,642        8,459

    Non-controlling
     interest                     122          200          264          232
                          ------------------------- -------------------------

    Net earnings          $     5,902  $     4,265  $    12,378  $     8,227
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    Basic earnings
     per share            $      0.05  $      0.05  $      0.11  $      0.14
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    Diluted earnings
     per share            $      0.05  $      0.05  $      0.11  $      0.13
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    Weighted average
     number of common
     shares               125,577,811   88,116,798  115,401,847   58,492,117
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    See accompanying notes to consolidated financial statements.



    DISCOVERY AIR INC.
    Consolidated Statements of Shareholders' Equity
    (thousands of dollars)

                                   for the                   for the
                             three months ended         nine months ended
                          ------------------------- -------------------------
                           October 31   October 31   October 31   October 31
                              2007         2006         2007         2006
                          ------------------------- -------------------------
                           (unaudited)  (unaudited)  (unaudited)  (unaudited)

    Share capital (note 6)

    Class A common shares:
    Outstanding,
     beginning of period  $   147,856  $   101,830  $   147,579  $     1,226
    Issued for cash                 -        2,441            -       19,938
    Issued on acquisition
     of subsidiary             30,563            -       30,563       81,900
    Issued on exercise
     of options                     -            -           15            -
    Issued on exercise
     of warrants                    -           37          262        1,992
                          ------------------------- -------------------------
                              178,419      104,308      178,419      105,056
    Less share issue
     costs, net of tax              -            -            -         (748)
                          ------------------------- -------------------------
    Outstanding, end
     of period            $   178,419  $   104,308  $   178,419  $   104,308
                          ------------------------- -------------------------

    Contributed surplus:
    Balance, beginning
     of period            $     5,827  $     3,085  $     4,780  $       224
    Fair value of
     warrants granted             433            -          433        2,832
    Warrants exercised              -            -            -         (390)
    Fair value of options
     granted                      499          159        1,551          578
    Options exercised               -            -           (5)           -
                          ------------------------- -------------------------
    Balance, end
     of period            $     6,759  $     3,244  $     6,759  $     3,244
                          ------------------------- -------------------------

                          ------------------------- -------------------------
    Total share capital   $   185,178  $   107,552  $   185,178  $   107,552
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    Retained earnings

    Retained earnings
     (deficit), beginning
     of period            $    10,187  $     3,957  $     3,711  $        (5)
    Net earnings                5,902        4,265       12,378        8,227
                          ------------------------- -------------------------
    Retained earnings,
     end of period        $    16,089  $     8,222  $    16,089  $     8,222
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    See accompanying notes to consolidated financial statements.



    DISCOVERY AIR INC.
    Consolidated Statements of Cash Flows
    (thousands of dollars)

                                   for the                   for the
                             three months ended         nine months ended
                          ------------------------- -------------------------
                           October 31   October 31   October 31   October 31
                              2007         2006         2007         2006
                          ------------------------- -------------------------
                           (unaudited)  (unaudited)  (unaudited)  (unaudited)

    Cash provided by
     (used in):

    Operations:
    Net earnings          $     5,902  $     4,265  $    12,378  $     8,227
    Items not
     involving cash:
      Future income tax
       expense (recovery)       1,146       (1,251)         380       (1,332)
      Amortization of
       buildings and
       equipment and
       intangibles              2,590        1,326        6,350        1,859
      Amortization of
       deferred engine
       overhaul expense         1,112          581        2,502          835
      Amortization of
       discount on long-
       term debt                  170            -          414            -
      Stock-based
       compensation
       (note 6)                   499          159        1,552          578
      Loss on sale of
       asset                       29            -           28            -
    Non-controlling
     interest                     122          200          264          232
    Change in other assets
     and liabilities
     (note 7)                   7,372        4,025       (9,693)          51
                          ------------------------- -------------------------
                               18,942        9,305       14,175       10,450
                          ------------------------- -------------------------

    Investing:
    Purchases of land,
     buildings and
     equipment                 (2,901)        (905)     (19,719)      (1,454)
    Proceeds on sale
     of equipment                 350            -          350            -
    Acquisition of
     subsidiary
     operations (Note 3)      (35,555)           -      (40,834)     (20,591)
    Cash acquired on
     acquisition of
     subsidiary
     operations (Note 3)        3,946                     3,946          961
                          ------------------------- -------------------------
                              (34,160)        (905)     (56,257)     (21,084)
                          ------------------------- -------------------------

    Financing:
    Repayment of bank loan     (1,189)           -            -            -
    Proceeds from
     long-term debt            32,729          156       48,337          848
    Repayment of
     long-term debt            (3,952)      (4,064)      (9,081)      (6,155)
    Net proceeds of
     common shares                  -           91          272       23,353
                          ------------------------- -------------------------
                               27,588       (3,817)      39,528       18,046
                          ------------------------- -------------------------

    Increase (decrease)
     in cash                   12,370        4,583       (2,554)       7,412

    Cash, beginning
     of period                  2,710        2,914       17,634           85
                          ------------------------- -------------------------

    Cash, end of period   $    15,080  $     7,497  $    15,080  $     7,497
                          ------------------------- -------------------------
                          ------------------------- -------------------------

    Supplementary cash
     flow information:
      Interest paid
       during the period  $     1,724  $        75  $     5,518  $     1,638
      Income taxes paid
       during the period  $       731  $         -  $     4,538  $     2,103


    See accompanying notes to consolidated financial statements.
    


    DISCOVERY AIR INC.
    Notes to the interim consolidated financial statements (unaudited)
    For the nine months ended October 31, 2007

    Discovery Air Inc. (the "Corporation") was incorporated on November 12,
2004 under the Ontario Business Corporations Act and on March 27, 2006 was
continued under the Canada Business Corporations Act. Its primary business
activities are carried out by its subsidiaries Great Slave Helicopters Ltd.
(GSHL), Air Tindi Ltd. (ATL), Top Aces Inc. (TAI), and Hicks & Lawrence
Limited (H&L).

    GSHL is a helicopter company that, independently and in partnership with
first nations aboriginal groups, operates a fleet of 73 helicopters and
provides services throughout northern Canada and several of the Canadian
provinces to governments and private sector companies in areas such as
resource and base mineral exploration and production, wildlife services,
forest fire suppression, oil and gas exploration, power line construction and
maintenance, aerial surveys, tourism and flight training. GSHL's principal
operations are carried out in Yellowknife, Northwest Territories and Calgary,
Alberta. It has additional facilities in Fort Simpson, Fort Liard, Norman
Wells and Inuvik in the Northwest Territories, Rankin Inlet in Nunavut,
Churchill in Manitoba and Dryden in Ontario.

    ATL operates a diversified fleet of 23 fixed wing aircraft, providing
scheduled and chartered passenger and cargo services, as well as air ambulance
services, in Northern Canada. Its customers include, among others, major
diamond and base mineral exploration and mining companies and the Government
of Canada and the Northwest Territories. ATL provides these services
independently and in partnership with a first nations aboriginal group.

    TAI is an approved supplier of airborne training services to the
Department of National Defence. With a fleet of 12 aircraft located throughout
Canada, TAI provides a variety of military training including simulated combat
and target tow.

    H&L is an Ontario-based aviation company that operates 31 aircraft
focused on providing specialized air transport services to niche aviation
markets in the Province of Ontario. H&L currently provides aerial forest fire
services to the Province of Ontario with 27 of its aircraft, which are
supported by flight operations and maintenance bases throughout Northern
Ontario. H&L also provides air charter services using four turbine aircraft to
the provincial government and various other corporate entities which conduct
business in Northwestern Ontario.

    The business of the Corporation follows a seasonal pattern with the
lowest revenues occurring from November to April. Furthermore, repairs and
maintenance on aircraft are not incurred evenly during the year and may also
vary from year to year. Therefore, the Corporation's results for the interim
period are not necessarily indicative of the results that may be expected for
a full year.

    
    1.  Accounting Policies:

        The consolidated financial statements have been prepared in
        accordance with Canadian generally accepted accounting principles
        ("GAAP"). The disclosures in these interim financial statements do
        not meet all disclosure requirements of GAAP for annual financial
        statements and should be read in conjunction with the Corporation's
        most recent audited annual consolidated financial statements for the
        three-month period ended January 31, 2007.

        These interim financial statements follow the same accounting
        policies as the most recent annual consolidated financial statements.

    2.  New Accounting Pronouncements:

        Inventories

        In May 2007, the Accounting Standards Board issued Handbook Section
        3031, Inventories, which supersedes Handbook Section 3030.

        The standard introduces significant changes to the measurement and
        disclosure of inventory. The measurement changes include: the
        elimination of LIFO, the requirement to measure inventories at the
        lower of cost and net realizable value, the allocation of overhead
        based on normal capacity, the use of specific cost method for
        inventories that are not ordinarily interchangeable or goods and
        services produced for specific purposes, the requirement for an
        entity to use a consistent cost formula for inventory of a similar
        nature and use, and the reversal of previous write-downs to net
        realizable value when there is a subsequent increase in the value of
        inventories. Disclosures of inventories have also been enhanced.
        Inventory policies, carrying amounts, amounts recognized as an
        expense, write-downs and the reversals of write-downs are required to
        be disclosed.

        This new standard will apply to the Corporation effective February 1,
        2008. The Corporation is assessing the impact this standard will have
        on its consolidated financial statements.

    3.  Business acquisition:

        On August 24, 2007, the Corporation acquired 100% of the outstanding
        shares of Top Aces Inc. (TAI) for cash consideration of
        $35.5 million, including transaction costs, and 20 million common
        shares which for accounting purposes will be recorded at
        approximately $30.6 million. The results of TAI's operations have
        been included in the Corporation's consolidated financial statements
        since the date of acquisition. The estimated fair value of the assets
        acquired and liabilities assumed are summarized in the table below:

        (thousands of dollars)
        ---------------------------------------------------------------------
        Net assets acquired:
        ---------------------------------------------------------------------

        Cash                                                     $     3,946
        Other current assets                                           7,616
        Land, buildings and equipment                                 15,858
        Current liabilities                                           (3,958)
        Long-term debt                                                (6,844)
        Future income tax liability                                   (7,554)
        Intangible assets                                             19,044
        Goodwill                                                      38,010
        ---------------------------------------------------------------------
                                                                 $    66,118
        ---------------------------------------------------------------------

        On March 14, 2007, the Corporation purchased the wheel division
        assets of Walsten Air Service (1986) Ltd., including aircraft, an
        aircraft hangar, associated equipment and inventory, and goodwill
        related to the business. The purchase price was $5.3 million. The
        results of its operations have been included in the Corporation's
        consolidated financial statements since the date of acquisition. The
        estimated fair value of the assets acquired and liabilities assumed
        are summarized in the table below:

        (thousands of dollars)
        ---------------------------------------------------------------------
        Net assets acquired:
        ---------------------------------------------------------------------

        Land, buildings and equipment                            $     4,403
        Current assets                                                   438
        Goodwill                                                         438
        ---------------------------------------------------------------------
                                                                 $     5,279
        ---------------------------------------------------------------------

        The Corporation has completed its initial valuation of certain
        acquired assets and liabilities for the above acquisitions however
        the allocation of the purchase price has not been finalized for the
        above and may change.

    4.  Goodwill:

        The Corporation tests goodwill for possible impairment on an annual
        basis and at any other time if an event occurs or circumstances
        change that would more likely than not reduce fair value of a
        reporting unit below its carrying amount. During the second quarter
        of fiscal 2008, the Corporation completed its goodwill impairment
        test for all reporting units. The results of the test have indicated
        that there is no impairment.

    5.  Long-term debt arrangements:

        The scheduled principal repayments of the long term debt over the
        next five years and thereafter are as follows (thousands of dollars):

        2008                                                     $    20,478
        2009                                                          14,456
        2010                                                          40,617
        2011                                                           6,577
        2012                                                          38,849
        Thereafter                                                    14,048


        The Corporation entered into a $33.0 million term loan agreement with
        a syndicate of lenders to finance a portion of the purchase
        consideration of TAI. The term loan has a coupon rate of 9.25% per
        annum and the principal balance is due on February 1, 2009. The term
        loan is secured by the shares of TAI and a second charge over all of
        TAI's fixed assets. As part of the term loan agreement the
        Corporation issued 1,178,568 warrants to the syndicate with a
        subscription price of $2.00 per share, expiring in July 2008. The
        warrants have a calculated value of $433,000 based on an effective
        rate of 10.25%

        The Corporation also assumed two term debt instruments in the
        acquisition of TAI that totalled approximately $6.6 million, bearing
        interest ranging from the lender's floating rate plus 4.0% to the
        lender's floating rate plus 5.5%. Both term debts mature on April 15,
        2008 and are secured by TAI's aircraft and engines.

    6.  Share capital and stock-based compensation:

        (a) Authorized and outstanding:

            The Corporation is authorized to issue an unlimited number of
            Class A common voting shares and an unlimited number of Class B
            common variable voting shares. As at October 31, 2007, there were
            130,235,665 Class A common voting shares issued and outstanding
            and 684,354 Class B common variable voting shares issued or
            outstanding.

        (b) Warrants:

            At October 31, 2007, the Corporation had 6,604,488 (2006 -
            7,986,542) common share purchase warrants issued and outstanding.
            The holders of 5,425,920 warrants are entitled to subscribe for 1
            Class A common share for every 1 warrant held for a subscription
            price of $1.75 per share; these warrants expire in December 2007.
            The holders of 1,178,568 warrants are entitled to subscribe for 1
            Class A common share for every 1 warrant held for a subscription
            price of $2.00 per share; these warrants expire in July 2008.

        (c) Stock-based compensation:

            During the nine months ended October 31, 2007, 2,989,400 (2006 -
            710,000) stock options with a weighted-average exercise price of
            $1.68 (2006 - $1.64) were granted, 20,000 (2006 - nil) stock
            options were exercised, 74,816 (2006 - nil) stock options were
            forfeited and 2,234 (2006 - nil) stock options expired. In the
            same period, salary expense of $1,552,000 (2006 - $578,000) has
            been recognized by the Corporation relating to the estimated fair
            value of the options that have been granted in total. As at
            October 31, 2007 there were 6,912,350 common shares issuable
            under options. The fair value of options granted was estimated
            using the Black-Scholes option pricing model based on the
            following assumptions: (i) weighted-average risk-free interest
            rate of 4.36%, (ii) expected option life of 4.5 years, (iii)
            expected volatility of 50%, and (iv) expected forfeiture rate of
            5%. The weighted-average fair value of options granted was
            estimated at $0.80 per share.

    7.   Change in other assets and liabilities

                                      for the                 for the
                                three months ended       nine months ended
                              ----------------------- -----------------------
        (thousands of         October 31  October 31  October 31  October 31
         dollars)                2007        2006        2007        2006
        --------------------------------------------- -----------------------

        --------------------------------------------- -----------------------
        Accounts receivable   $    7,127  $    6,279  $  (13,296) $   (2,498)
        Inventory                   (898)       (423)       (959)       (934)
        Prepaid expenses
         and other                (1,768)       (426)     (1,818)        (70)
        Accounts payable and
         accrued liabilities         894      (4,278)      3,738      (1,126)
        Income taxes payable       2,017       2,873       2,642       4,679
        --------------------------------------------- -----------------------
                              $    7,372  $    4,025  $   (9,693) $       51
        --------------------------------------------- -----------------------

    8.  Related party transactions:

        At October 31, 2007, the Corporation had total indebtedness,
        including accrued interest, of $18.2 million (2006 - $16.6 million),
        bearing an interest rate range of prime to prime plus 1% per annum,
        owing primarily to officers and directors of the Corporation or its
        subsidiaries and who were former owners of the subsidiaries. For the
        nine months ended October 31, 2007, interest expense on this debt
        totalled $880,000 (2006 - $435,000).

    9.  Income taxes:

                                      for the                 for the
                                three months ended       nine months ended
                              ----------------------- -----------------------
        (thousands of         October 31  October 31  October 31  October 31
         dollars)                2007        2006        2007        2006
        --------------------------------------------- -----------------------

        Tax provision at
         basic rate of 34%
         (2006 - 34%)         $    3,129  $    2,212  $    6,567  $    4,394

        Changes resulting from:
          Stock-based
           compensation              181          54         561         197
          Other permanent
           differences                17           -          50           -
          Adjustment to future
           tax assets and
           liabilities for
           enacted changes in
           tax laws and rates          -        (225)       (352)      (127)

        --------------------------------------------- -----------------------
        Balance, end of
         period               $    3,327  $    2,041  $    6,826  $    4,464
        --------------------------------------------- -----------------------

    10. Commitments:

        The Corporation has annual lease obligations for aircraft and
        premises. Amounts under these leases for each of the five succeeding
        years and thereafter are as follows (thousands of dollars):

        2008                                                      $    2,560
        2009                                                           1,543
        2010                                                             839
        2011                                                             758
        2012 and thereafter                                              917


        The Corporation has entered into an agreement to purchase aircraft,
        and various aircraft parts over the next two years with a commitment
        remaining of approximately $12.5 million. This purchase will be
        funded with a combination of working capital and term debt.

        The Corporation has entered into a Letter of Intent to acquire the
        issued and outstanding shares of Discovery Mining Services Ltd. (DMS)
        in exchange for $3.0 million cash, $2.0 million vendor-take-back note
        payable and $5.0 million in common shares of the Corporation.
        Completion of the transaction is subject to due diligence, receipt of
        regulatory approvals and entering into a definitive purchase and sale
        agreement with the shareholders of DMS. DMS is a leading provider of
        remote exploration camps, expediting, logistics and staking services
        to a broad spectrum of gold, base metal, uranium, and diamond
        exploration companies operating in the Northwest Territories,
        Nunavut, Northern Alberta and Saskatchewan. DMS has its head office
        located in Yellowknife, Northwest Territories. The transaction is
        expected to close in the fourth quarter of the current fiscal year.

    11. Segmented information:

        The Corporation has two reportable business segments: rotary wing and
        fixed wing. These segments are differentiated by the nature of the
        aircraft used to provide aviation services. The rotary wing segment
        is represented by helicopter charter services as provided by GSHL and
        the fixed wing segment is represented by airplane services as
        provided by ATL, TAI and H&L. Customers serviced by both segments
        consist of governments and private sector companies in the resource
        and base mineral exploration and production, wildlife services,
        forest fire suppression, oil and gas exploration, power line
        construction and maintenance, aerial surveys exploration, tourism and
        flight training.

        All other activities that are not allocated to these two business
        segments are reported under Corporate Support or part of non-
        segmented items.


    (thousands of dollars)     for the three months ended October 31, 2007
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    Revenue                   $   23,290  $   18,314  $        8  $   41,612
    -------------------------------------------------------------------------

    Operating expenses            13,336      12,218       1,346      26,900
    Amortization                   1,028       1,554           8       2,590
    Non-segmented items:
      Financing costs                  -           -           -       2,771
      Income taxes                     -           -           -       3,327
      Minority interest                -           -           -         122
    Net earnings (loss)            8,926       4,542      (1,346)      5,902
    -------------------------------------------------------------------------

    Total assets              $  187,290  $  199,647  $    2,586  $  389,523
    -------------------------------------------------------------------------


    (thousands of dollars)     for the three months ended October 31, 2006
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    Revenue                   $   20,249  $    1,871  $       13  $   22,133
    -------------------------------------------------------------------------

    Operating expenses            11,245       1,348         779      13,372
    Amortization                   1,214         112           -       1,326
    Non-segmented items:
      Financing costs                  -           -           -         929
      Income taxes                     -           -           -       2,041
      Minority interest                -           -           -         200
    Net earnings (loss)            7,790       411          (766)      4,265
    -------------------------------------------------------------------------

    Total assets              $  172,343  $    9,410  $    1,916  $  183,669
    -------------------------------------------------------------------------


    (thousands of dollars)      for the nine months ended October 31, 2007
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    Revenue                   $   61,098  $   40,066  $       99  $  101,263
    -------------------------------------------------------------------------

    Operating expenses            37,390      27,293       3,944      68,627
    Amortization                   2,801       3,528          21       6,350
    Non-segmented items:
      Financing costs                  -           -           -       6,818
      Income taxes                     -           -           -       6,826
      Minority interest                -           -           -         264
    Net earnings (loss)           20,907       9,245      (3,866)     12,378
    -------------------------------------------------------------------------

    Total assets              $  187,290  $  199,647  $    2,586  $  389,523
    -------------------------------------------------------------------------


    (thousands of dollars)      for the nine months ended October 31, 2006
    -------------------------------------------------------------------------
                                 Rotary      Fixed     Corporate
                                  Wing        Wing      Support      Total
    -------------------------------------------------------------------------

    Revenue                   $   34,533  $    5,766  $       29  $   40,328
    -------------------------------------------------------------------------

    Operating expenses            19,200       3,133       1,758      24,091
    Amortization                   1,555         304           -       1,859
    Non-segmented items:
      Financing costs                  -           -           -       1,455
      Income taxes                     -           -           -       4,464
      Minority interest                -           -           -         232
    Net earnings (loss)           13,778       2,329      (1,729)      8,227
    -------------------------------------------------------------------------

    Total assets              $  172,343  $    9,410  $    1,916  $  183,669
    -------------------------------------------------------------------------
    





For further information:

For further information: Wade MacBain, Director of Investor Relations,
Phone: (519) 951-3580, Toll-free: 1-866-903-3247, ext. 3580, E-mail:
wadem@discoveryair.com


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