Discovery Air Inc. announces results for its first quarter ended April 30, 2007



    LONDON, ON, June 13 /CNW/ -

    
                     FIRST QUARTER FINANCIAL HIGHLIGHTS

    -   Net loss totalled $3.6 million or a loss of $0.03 per share (a loss
        of $0.03 diluted) for the quarter compared to a net loss of $448,000
        or a loss of $0.02 per share (a loss of $0.02 diluted) for the same
        period a year ago.
    -   Revenues were $16.1 million for the quarter compared to revenues of
        $84,000 for the same quarter last year.
    -   Total hours flown were 11,570 for the quarter compared to nil hours
        for the same quarter last year.
    -   EBITDA was a loss of $805,000 for the quarter compared to a loss of
        $525,000 for the same quarter last year.
    

    PRESIDENT'S COMMENTS

    I am pleased with this quarter's results. Based on information provided
by Air Tindi, Great Slave Helicopters and Hicks & Lawrence, total flying hours
for this quarter were up approximately 15.5% over that achieved by these
companies during the same quarter last year, prior to Air Tindi and Great
Slave Helicopters joining Discovery Air. This is particularly heartening in
that the ice road leading north from Yellowknife was in excellent shape this
year, as opposed to last year where unseasonably warm weather had severely
shortened use of the road.
    This is the first quarter that represents the full operating results of
all of our subsidiary companies and reflects some of the synergies that we
have been working on, including fuel savings, insurance savings and shared
facilities, however it also includes the cost of issuing options to all of our
employees, which was a cost of $637,000.
    Hicks & Lawrence made renovations to their hangar facility in Dryden,
Ontario to accommodate both fixed wing and rotary wing aircraft. In this
quarter, Superior Helicopters, a subsidiary of Great Slave Helicopters, moved
its base of operations from Longlac, Ontario to the new facility in Dryden.
This new facility will enable Discovery Air to provide comprehensive fixed
wing and rotary wing aerial forest fire management services to the Ontario
Government.
    In this quarter, Hicks & Lawrence acquired the wheel division of Walsten
Air Service (1986) Ltd. This expands the air service portfolio offered by
Hicks & Lawrence to include turbine charter services. We see this addition to
our Ontario business as providing material opportunities for new business
growth.
    As previously press released, Great Slave Helicopters recently took
delivery of the first two Eagle Single helicopters, both of which have been
deployed to aid in forest fire suppression.
    With the present businesses carried on by our subsidiaries, we are
subject to fairly dramatic seasonal revenues. We look forward to releasing the
results of our next two quarters which represent much busier seasons.


    
    FINANCIAL HIGHLIGHTS

                                                  for the three months ended
    -------------------------------------------------------------------------
    (unaudited)
                                                      April 30      April 30
    ($ thousands, except per share amounts)               2007          2006
    -------------------------------------------------------------------------

    Results of operations
      Revenue                                     $     16,067  $         84
      Direct expenses                                   13,969           356
      Other expenses                                     7,150           396
      Net earnings (loss)                               (3,581)         (448)
      Earnings (loss) per common share:
        Basic                                     $      (0.03) $      (0.02)
        Diluted                                   $      (0.03) $      (0.02)
      Total assets                                $    286,698  $     11,469
    

    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis of financial condition
for the first quarter of fiscal 2008 should be read in conjunction with the
unaudited interim consolidated financial statements and related notes for the
period ended April 30, 2007 included herein and the annual audited
consolidated financial statements and related notes for the three-month period
ended January 31, 2007, which are available on SEDAR at www.sedar.com.

    Business Profile

    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. and
its subsidiaries and partners (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).
    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 and H&L, including its Walsten
division. GSHL is a Yellowknife-based helicopter company that provides charter
services throughout northern Canada and several of the Canadian provinces 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 Yellowknife-based
airplane aviation 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,
scheduled routes and tourism. ATL also provides air ambulance services
throughout the Northwest Territories. H&L is an Ontario-based aviation company
focused on providing air services to niche markets in the province, primarily
to the government. Non-segmented activities are classified as Corporate
Support.
    Due to the nature of the operations of these two operating segments,
there is increased demand for these aviation services normally commencing in
the spring and continuing through to the end of the summer. 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.

    Business Acquisitions

    On March 14, 2007, the Corporation's subsidiary, H&L, purchased the wheel
division and related assets of Walsten Air Service (1986) Ltd, including four
Beech King Air aircrafts, an aircraft hangar, and associated equipment and
inventory located in Kenora, Ontario and goodwill related to the business for
a total cash consideration of $5.3 million. See Note 2 to the interim
consolidated financial statements for further information on this acquisition.
The results of the operations of Walsten included in these interim
consolidated financial statements are from the date of acquisition, March 14,
2007.

    Overview

    Hours flown for the three-month period ended April 30, 2007, were 11,570
resulting in revenues of $16.1 million for the quarter. Net loss of the
Corporation for the quarter was $3.6 million or a loss of $0.03 per share
compared to a loss of $448,000 or a loss of $0.02 per share for the same
period last year. For the three-month period ended April 30, 2007, EBITDA was
a loss of $805,000 compared to a loss of $525,000 for the same period in the
prior year (see Non-GAAP Measures).

    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. Revenue for the three-month period
ended April 30, 2007, totalled $16.1 million compared to $84,000 for the same
period a year ago. Hours flown for the quarter were 11,570 compared to nil
hours for the same period a year ago.
    The Corporation's rotary wing division, which delivers helicopter
transportation services through GSHL, flew 7,107 hours during the most recent
quarter, generating total revenue of $8.9 million. GSHL was not a subsidiary
of the Corporation during the same period in the prior year and therefore did
not contribute to the hours flown or revenue during that period.
    The Corporation's fixed wing division, which delivers airplane
transportation services through ATL and H&L, including its Walsten division,
flew 4,463 hours generating revenue of $7.1 million during the most recent
quarter compared to nil hours flown and $84,000 of revenue, which related
primarily to basing and positioning fees, for the same period in the prior
year. The hours flown and revenue for the current quarter reflect the activity
of ATL for the full quarter and Walsten from the date of acquisition to the
end of the quarter. These operations were not owned by the Corporation during
the same period in the prior year and therefore did not contribute to hours
flown or revenue during that period.

    Operating Expenses

    Operating expenses consist of fixed and variable expenses including crew
and maintenance costs and general and administrative expenses.
    Crew and maintenance costs are the largest expense categories. Crew costs
are comprised of wages, benefits and training for pilots and maintenance
engineers. Maintenance costs consist of the purchase, repair and overhaul of
parts, major components and accessories. As the Corporation attempts to
perform most major repairs and refurbishment during the slower fall and winter
seasons, maintenance costs from quarter to quarter may vary.
    General and administrative expenses are mainly comprised of wages and
benefits of administrative personnel, base costs, which include facility costs
and travel costs, insurance costs and other overhead expenses. These costs
contain both a fixed and variable cost component.
    Operating expenses totalled $16.9 million for the most recent quarter
compared to $609,000 for the same period last year. The results for the
quarter ended April 30, 2006 reflect only the costs associated with the
operation of H&L and the cost of corporate services required to support that
level of operation. The scale of operation has increased significantly year
over year and the level of costs in the most recent quarter reflect the
inclusion of the operating expenses incurred by GSHL, ATL and Walsten as well
as the increased cost of corporate services required to support a much larger
scale of business operations.

    Other Expenses

    Other expenses consisting of financing charges and amortization expense
were $1.9 million and $2.3 million, respectively, for the quarter compared to
$103,000 and $40,000 respectively, for the same period last year. The increase
in financing charges and amortization expense was due primarily to expenses
associated with the addition of GSHL, ATL and Walsten that were not included
in the prior year's expenses.
    The rotary wing division incurred financing charges and amortization
expenses of $710,000 and $1.0 million, respectively, in the current quarter.
There are no comparables for the same period last year as GSHL was acquired in
June 2006. The fixed wing segment incurred financing charges and amortization
expenses of $458,000 and $1.3 million, respectively, in the current quarter
compared to $103,000 and $40,000, respectively, for the same period last year.
The ATL and Walsten acquisitions are not reflected in the comparatives as
these purchases were completed in December 2006 and March 2007 respectively.
The Corporate Support segment incurred financing charges of $751,000 for the
quarter, which relates to the convertible debentures issued in December 2006,
and $nil amortization charge. There were no financing charges and amortization
expense incurred by the Corporate Support segment in the same period last
year.

    Income Taxes

    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.
    For the three months ended April 30, 2007, the Corporation recorded an
income tax recoverable of $1.5 million. The Corporation's effective statutory
rate approximates 34%, however due to non-deductible charges related to
stock-based compensation, the income tax recoverable for the three month
period ended April 30, 2007 was reduced to 29%.

    Liquidity and Working Capital

    Cash resources at April 30, 2007 were $7.3 million compared to
$2.2 million a year ago and $17.6 million as at January 31, 2007. At April 30,
2007, the Corporation had working capital of $11.0 million compared to
$2.2 million a year ago and $16.5 million at January 31, 2007. The increase in
cash and the improvement in working capital from a year ago were due primarily
to the acquisition and inclusion of the operations of GSHL and ATL as well as
funds raised for working capital purposes from public and private equity and
convertible debenture offerings. The decrease in cash and working capital as
compared to the quarter ended January 31, 2007 is due primarily to cash used
to fund the most recent quarterly operations, to fund a portion of the Walsten
acquisition, to purchase new aircrafts, and to make scheduled term debt
repayments.
    Accounts receivable at April 30, 2007, were $15.6 million compared to
$12.0 million at January 31, 2007, and $98,000 a year ago. The increase in
accounts receivable from January 31, 2007 was due primarily to the inclusion
of Walsten and increased revenue volumes for GSHL and ATL in the current
quarter. The increase over the prior year is due primarily to the inclusion of
accounts receivable from the operations of GSHL of $9.6 million and ATL of
$5.7 million. Inventory, consisting of parts and supplies, totalled
$9.5 million at April 30, 2007, compared to $9.5 million at January 31, 2007
and $407,000 a year ago. The increase over the prior year was due primarily to
the inclusion of the inventory of GSHL and ATL in the current quarter,
accounting for $5.7 million and $2.7 million, respectively, of the total April
30, 2007 inventory balance.
    Accounts payable and accrued liabilities were $9.9 million at April 30,
2007 compared to $7.8 million at January 31, 2007 and $672,000 a year ago. The
increase from the prior year was due to the inclusion of GSHL and ATL, which
accounted for $4.9 million and $3.3 million, respectively, of the total
April 30, 2007 accounts payable and accrued liabilities.
    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 April 30, 2007 totalled $111.3 million
compared to $97.8 million at January 31, 2007 and $6.3 million a year ago with
the increases due primarily to the inclusion of land, buildings and equipment
of GSHL, ATL and Walsten which totalled $50.8 million, $28.0 million and
$4.4 million respectively. The Corporation also purchased $10.9 million of
capital assets comprised mostly of aircrafts during the most recent quarter.
Goodwill and other intangibles was $140.8 million at April 30, 2007 compared
to $140.9 million at January 31, 2007 and $1.2 million a year ago with the
increase from a year ago due to goodwill and other intangibles recorded on the
acquisition of GSHL, ATL and, in the most recent quarter, Walsten.

    Debt Financing

    Debt at April 30, 2007, totalled $99.3 million compared to $89.0 million
as at January 31, 2007 and $5.0 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 GSHL, ATL and, in the most recent quarter, Walsten as well as the issuance
of convertible debentures by the Corporation in December 2006. In the most
recent quarter, the Corporation also incurred $7.9 million of additional debt
to fund the purchase of new aircraft.

    Shareholders' Equity

    Shareholders' equity at April 30, 2007, totalled $153.4 million compared
to $4.4 million a year ago with the increase attributable to the retention of
earnings, the issuance of Class A common shares on the acquisition of GSHL and
ATL, the private placement of Class A common shares, the exercise of warrants,
the fair value attributable to the conversion feature on the convertible
debentures and the fair value of options granted. At April 30, 2007, the
Corporation had 110,900,019 Class A common shares compared to 33,977,271 Class
A common shares outstanding last year. The increase was due to 76.9 million
Class A common shares issued during the most recent 12 month period as
follows: the issue of 40.0 million Class A common shares as partial
consideration for the acquisition of GSHL, the issue of 20.0 million Class A
common shares as partial consideration for the acquisition of ATL,
12.1 million Class A common shares issued through a private placement in
June 2006, and 4.8 million Class A common shares issued on the exercise of
warrants.
    There were 5,425,920 common share purchase warrants outstanding at
April 30, 2007, entitling the holders to subscribe for one Class A common
share for every warrant held at a subscription price of $1.75 per share.
    There were 5,356,050 common share options outstanding at April 30, 2007,
1,366,050 of which were granted during the quarter ended April 30, 2007. For
the quarter ended April 30, 2007, salary expense and an addition to
contributed surplus of $637,000 has been recognized 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, none of which are issued and outstanding. 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
4 to the interim consolidated financial statements.

    Updated Share Information

    At June 11, 2007, there were 110,900,019 Class A 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.

    Related Party Transactions

    At April 30, 2007, the Corporation had total indebtedness, including
accrued interest, of $18.7 million (2006-$nil) owing primarily to officers and
directors of the Corporation or its subsidiaries and who were former owners of
the subsidiaries. For the quarter ended April 30, 2007, interest expense on
this debt totalled $287,000 (2006-$nil).

    
    Summary of Quarterly Results

    (thousands of
     dollars
     except
     per share
     amounts)         2008    2007(*)                     2006
    ------------- ---------- -------- ---------------------------------------
                        Q1        Q1        Q4        Q3        Q2        Q1
                    Apr 30    Jan 31    Oct 31    Jul 31    Apr 30    Jan 31

    Results of
     operations:
    Total
     revenue      $ 16,067  $  7,114  $ 22,133  $ 18,111  $     84  $     22
    Total
     expenses       21,119    15,288    15,627    11,026       752       735
    Income (loss)
     before
     income
     taxes          (5,052)   (8,174)    6,506     7,085      (668)    (713)
    Income tax
     provision
     (recovery)     (1,466)   (3,616)    2,041     2,643      (220)    (176)
    Non-controlling
     interest           (5)      (47)      200        32         -        -
    Net earnings
     (loss)         (3,581)   (4,511)    4,265     4,410      (448)    (537)
    Earnings
     per share
      -basic      $  (0.03) $  (0.05) $   0.05  $   0.08  $  (0.02) $ (0.02)
      -diluted    $  (0.03) $  (0.05) $   0.05  $   0.07  $  (0.02) $ (0.02)

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


    Summary of Quarterly Results

    (thousands of
     dollars
     except
     per share
     amounts)               2005
    ------------- -------------------
                        Q4        Q3
                    Oct 31    Jul 31

    Results of
     operations:
    Total
     revenue      $  1,525  $  3,471
    Total
     expenses        1,395     1,469
    Income (loss)
     before
     income
     taxes             130     2,002
    Income tax
     provision
     (recovery)         41       722
    Non-controlling
     interest           72       643
    Net earnings
     (loss)             17       637
    Earnings
     per share
      -basic      $      -  $   0.04
      -diluted    $      -  $   0.04

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

    Dated:  June 11, 2007
    


    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 April 30, 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.

    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 a supplemental financial measure 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 three months ended
                                                  ---------------------------
                                                      April 30      April 30
    (thousands of dollars)                                2007          2006
    -------------------------------------------------------------------------
                                                    (unaudited)   (unaudited)

    Earnings (loss) before non-controlling
     interest                                     $     (3,586) $       (448)
    Income taxes                                        (1,466)         (220)
    Financing charges                                    1,919           103
    Amortization                                         2,328            40
    -------------------------------------------------------------------------
    EBITDA                                        $       (805) $       (525)
    -------------------------------------------------------------------------



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

                                        April 30    January 31      April 30
                                            2007          2007          2006
                                      (unaudited)     (audited)   (unaudited)
                                    ------------- ------------- -------------

    Assets
    Current assets:
      Cash                          $      7,285  $     17,634  $      2,215
      Accounts receivable                 15,559        12,028            98
      Inventory                            9,547         9,532           407
      Prepaid expenses and other           2,153         1,817         1,258
                                    ------------- ------------- -------------
                                          34,544        41,011         3,978

    Land, buildings and equipmen         111,328        97,840         6,304

    Intangible assets                     26,250        26,754           175

    Goodwill                             114,576       114,159         1,012
                                    ------------- ------------- -------------
                                    $    286,698  $    279,764  $     11,469
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------

    Liabilities and Shareholders'
     Equity
    Current liabilities:
      Accounts payable and accrued
       liabilities                  $      9,865  $      7,842  $        672
      Income taxes payable                 1,440         2,435             -
      Current portion of
       long-term debt (note 3)            12,277        14,218         1,146
                                    ------------- ------------- -------------
                                          23,582        24,495         1,818
                                    ------------- ------------- -------------

    Long-term debt, secured
     (note 3)                             87,057        74,729         3,884

    Future income taxes                   21,042        22,837         1,347

    Non-controlling interest               1,629         1,633             -

    Shareholders' equity
      Share capital (note 4)             153,258       152,359         4,873
      Retained earnings (deficit)            130         3,711          (453)
                                    ------------- ------------- -------------
                                         153,388       156,070         4,420
                                    ------------- ------------- -------------
                                    $    286,698  $    279,764  $     11,469
                                    ------------- ------------- -------------
                                    ------------- ------------- -------------

    See accompanying notes to consolidated financial statements.



    DISCOVERY AIR INC.
    Consolidated Statement of Earnings (Loss)
    (thousands of dollars)

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
                                                          2007          2006
                                                  ---------------------------
                                                    (unaudited)   (unaudited)


    Revenue                                       $     16,067  $         84
    Operating expenses                                  16,872           609
                                                  ---------------------------
                                                          (805)         (525)

    Financing charges                                    1,919           103
    Amortization of buildings and equipment              1,825            29
    Amortization of intangible assets                      503            11
                                                  ---------------------------
                                                         4,247           143
                                                  ---------------------------
    Earnings (loss) before income taxes and
     non-controlling interest                           (5,052)         (668)

    Income taxes (recovery) (note 7)                    (1,466)         (220)

    Earnings (loss) before non-controlling
     interest                                           (3,586)         (448)

    Non-controlling interest                                (5)            -
                                                  ---------------------------

    Net earnings (loss)                           $     (3,581) $       (448)
                                                  ---------------------------
                                                  ---------------------------

    Basic earnings (loss) per share               $      (0.03)       ($0.02)
                                                  ---------------------------
                                                  ---------------------------

    Diluted earnings (loss) per share             $      (0.03)       ($0.02)
                                                  ---------------------------
                                                  ---------------------------

    Weighted average number of common shares       109,535,000    28,354,000
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements.



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

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
                                                          2007          2006
                                                  ---------------------------
                                                    (unaudited)   (unaudited)

    Share capital (note 4)

    Class A common shares:
    Outstanding, beginning of period              $    147,579  $      1,226
    Issued for cash                                          -         3,850
    Issued on exercise of warrants                         262             -
                                                  ---------------------------
                                                       147,841         5,076
    Less share issue costs, net of tax                       -          (583)
                                                  ---------------------------
    Outstanding, end of period                    $    147,841  $      4,493
                                                  ---------------------------

    Contributed surplus:
    Balance, beginning of period                  $      4,780  $        224
    Fair value of options granted                          637           156
                                                  ---------------------------
    Balance, end of period                        $      5,417  $        380
                                                  ---------------------------

                                                  ---------------------------
    Total share capital                           $    153,258  $      4,873
                                                  ---------------------------
                                                  ---------------------------


    Retained earnings

    Retained earnings (deficit), beginning
     of period                                    $      3,711  $         (5)
    Net loss                                            (3,581)         (448)
                                                  ---------------------------
    Retained earnings (deficit), end of period    $        130  $       (453)
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements.



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

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
                                                          2007          2006
                                                  ---------------------------
                                                    (unaudited)   (unaudited)

    Cash provided by (used in):

    Operations:
    Net earnings (loss)                           $     (3,581) $       (448)
    Items not involving cash:
      Future income tax expense (recovery)              (1,795)          (29)
      Amortization                                       2,328            40
      Amortization of discount on convertible
       debenture                                           120	            -
      Stock-based compensation (note 4)                    637            56
    Non-controlling interest                                (5)            -
    Change in other assets and liabilities
     (note 5)                                           (2,416)         (375)
                                                  ---------------------------
                                                        (4,712)         (756)
                                                  ---------------------------

    Investing:
    Equipment                                          (10,908)          (50)
    Acquisition of subsidiary operations (note 2)       (5,258)            -
                                                  ---------------------------
                                                       (16,166)          (50)
                                                  ---------------------------

    Financing:
    Proceeds from long-term debt                        12,193           550
    Repayment of long-term debt                         (1,926)         (710)
    Net proceeds of common shares                          262         3,096
                                                  ---------------------------
                                                        10,529         2,936
                                                  ---------------------------


    Increase (decrease) in cash                        (10,349)        2,130

    Cash, beginning of period                           17,634            85
                                                  ---------------------------

    Cash, end of period                           $      7,285  $      2,215
                                                  ---------------------------
                                                  ---------------------------


    Supplementary cash flow information:
      Interest paid during the period             $      1,105  $        116
      Income taxes paid during the period         $      1,361  $          3

    See accompanying notes to consolidated financial statements.
    


    DISCOVERY AIR INC.
    Notes to the interim consolidated financial statements (unaudited)
    For the three months ended April 30, 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) and Hicks & Lawrence Limited (H&L) including the
activities of its recently acquired Walsten division (Walsten).

    GSHL is a helicopter company that, independently and in partnership with
first nations aboriginal groups, operates a fleet of over 70 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 offering
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.

    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. Its primary flight operations and maintenance base is located in
Dryden, Ontario. On March 14, 2007, H&L purchased the wheel division and
related assets of Walsten Air Service (1986) Ltd, including 4 Beech King Air
aircrafts, an aircraft hangar and associated equipment and inventory located
in Kenora, Ontario and goodwill related to the business.

    The business of the Corporation follows a seasonal pattern with the
lowest revenues occurring from November to April. 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 ended January 31, 2007.

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

    2.  Business acquisition:

        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                                                         417
        ---------------------------------------------------------------------
                                                                $      5,258
        ---------------------------------------------------------------------


    3.  Secured debt arrangements:

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

        2008                                                    $     12,277
        2009                                                          13,358
        2010                                                           9,302
        2011                                                           6,297
        2012                                                          38,051
        Thereafter                                                    20,049


    4.  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 April 30, 2007, there were 110,900,019
        Class A common voting shares issued and outstanding and no Class B
        common variable voting shares issued or outstanding.

    (b) Warrants:

        At April 30, 2007, the Corporation had 5,425,920 (2006-3,365,908)
        common share purchase warrants issued and outstanding. The holders of
        these 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.
        The warrants expire in 2007.

    (c) Stock-based compensation:

        During the three months ended April 30, 2007, 1,336,050 (2006-nil)
        stock options with a weighted-average exercise price of $1.84 (2006-
        $nil) were granted. Salary expense of $637,000 (2006-$56,000) has
        been recognized by the Corporation relating to the estimated fair
        value of the 5,356,050 options that have been granted in total. 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 4.01%, (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 $0.84 per share.

    5.  Change in other assets and liabilities

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
        (thousands of dollars)                            2007          2006
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        Accounts receivable                       $     (3,531) $        (68)
        Inventory                                          423            (9)
        Prepaid expenses and other                        (336)         (575)
        Accounts payable and accrued liabilities         2,023           277
        Income taxes payable                              (995)            -
        ---------------------------------------------------------------------
                                                  $     (2,416) $       (375)
        ---------------------------------------------------------------------


    6.  Related party transactions:

        At April 30, 2007, the Corporation had total indebtedness, including
        accrued interest, of $18.7 million (2006-$nil), 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 quarter ended
        April 30, 2007, interest expense on this debt totalled $287,000
        (2006-$nil).

    7.  Income taxes:

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
        (thousands of dollars)                            2007          2006
        ---------------------------------------------------------------------
        Tax provision at basic rate of 34%
         (2006-36%)                               $     (1,712) $       (240)

        Changes resulting from:
          Stock-based compensation                         246            20
        ---------------------------------------------------------------------
        Balance, end of period                    $     (1,466) $       (220)
        ---------------------------------------------------------------------


    8.  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:

        2008                                                    $      6,317
        2009                                                           2,923
        2010                                                           1,525
        2011                                                           1,519
        2012 and thereafter                                            2,520


        The Corporation is committed to purchase an additional aircraft for
        an estimated purchase price of $3.5 million.

    9.  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, H&L and Walsten. 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.

     (thousands of dollars)        for the three months ended April 30, 2007
    -------------------------------------------------------------------------
                               Rotary        Fixed    Corporate
                                 Wing         Wing      Support        Total
    -------------------------------------------------------------------------
    Revenue                $    8,918   $    7,086   $       63   $   16,067
    -------------------------------------------------------------------------
    Operating expenses          8,537        6,862        1,473       16,872
    Amortization                1,041        1,287            -        2,328
    Financing costs               710          458          751        1,919
    Income taxes                 (982)        (836)         352       (1,466)
    Net earnings (loss)          (376)        (692)      (2,513)      (3,581)
    -------------------------------------------------------------------------

    Total assets           $  169,413   $  113,590   $    3,695   $  286,698
    -------------------------------------------------------------------------


    (thousands of dollars)         for the three months ended April 30, 2006
    -------------------------------------------------------------------------
                               Rotary        Fixed    Corporate
                                 Wing         Wing      Support        Total
    -------------------------------------------------------------------------
    Revenue                $        -   $       84   $        -   $       84
    -------------------------------------------------------------------------
    Operating expenses              -          529           80          609
    Amortization                    -           40            -           40
    Financing costs                 -          103            -          103
    Income taxes                    -         (191)         (29)        (220)
    Net earnings (loss)             -         (397)         (51)        (448)
    -------------------------------------------------------------------------

    Total assets           $        -   $    9,276    $   2,193   $   11,469
    -------------------------------------------------------------------------
    


    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.





For further information:

For further information: Wade MacBain, Director of Investor Relations,
Phone: (519) 913-2204, ext. 358, Toll-free: (866) 903-3247, ext. 358, E-mail:
wadem@discoveryair.com


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