Discovery Air Inc. announces results for its first quarter ended April 30, 2008



    LONDON, ON, June 13 /CNW/ -

    
    FIRST QUARTER FINANCIAL HIGHLIGHTS

    -   Revenues were $30.8 million for the quarter compared to $16.1 million
        for the comparative period last year.
    -   Total hours flown were 12,365 for the quarter compared to
        11,570 hours for the comparative period last year.
    -   EBITDA was $2.3 million for the quarter compared to EBITDA loss of
        $805,000 for the comparative period last year.
    -   EBITDAR was $4.7 million for the quarter compared to $1.1 million for
        the comparative period last year.
    -   Net loss for the quarter was $2.7 million or $(0.02) per share (basic
        and diluted) compared to net loss of $3.6 million or $(0.03) per
        share (basic and diluted) for the same period last year.
    -   The Corporation re-aligned its segment information starting in fiscal
        2009 to match the financial reporting segments with recent
        organizational changes and management's evaluation of the economic
        environment of the Corporation's operations (See Business Profile).
    

    The Corporation's results of operations reflect the impact of seasonal
fluctuations. The results of operations are also impacted by the timing of the
Corporation's recent acquisitions. Therefore the results reflected in one
period may not be indicative of the results that may be achieved in another
period.

    PRESIDENT'S COMMENTS

    I continue to be very pleased with the performance of the investments we
have made. The current quarter results represent a good start to the year and
reflect the combined contribution of both organic growth, as our existing
businesses demonstrated strong year over year growth in revenues, and more
notably, acquisition growth highlighted by the full quarter results for Top
Aces and Discovery Mining.
    Revenues were $30.8 million for the quarter compared to $16.1 million for
the comparative period last year. EBITDA was $2.3 million for the quarter
compared to EBITDA loss of $805,000 for the comparative period last year.
After-tax operating cash flow(*) for the quarter was $1.7 million (or $0.01 per
share) compared to negative after-tax operating cash flow of $2.0 million (or
negative $0.02 per share) for the same quarter last year. This speaks to the
positive effect that our most recent acquisitions have had in improving
performance during a seasonally slow period for our other businesses.

    
    (*) After-tax operating cash flow is a non-GAAP measure calculated as net
        earnings adjusted for the effect of amortization, deferred charges
        and other non-cash items in the statement of earnings.


    Selected Financial Information

    --------------------------------------------- ------------- -------------
                                                      3 months      3 months
                                                         ended         ended
                                                      April 30      April 30
    ($ thousands, except per share amounts)               2008          2007
    --------------------------------------------- ------------- -------------
                                                    (unaudited)   (unaudited)
    Results of operations
      Revenue                                       $   30,754    $   16,067
      Operating expenses                            $   28,439    $   16,872
      EBITDAR(*)                                    $    4,657    $    1,082
      EBITDA(*)                                     $    2,315    $     (805)
      After-tax operating cash flow(*)              $    1,711    $   (1,961)
      Net loss                                      $   (2,700)   $   (3,581)
      Loss per common share:
        Basic                                       $    (0.02)   $    (0.03)
        Diluted                                     $    (0.02)   $    (0.03)

      Total assets                                  $  393,665    $  286,698
      Total long-term debt                          $  142,788    $   99,334

    (*) See Non-GAAP Measures
    


    MANAGEMENT'S DISCUSSION AND ANALYSIS

    The following management's discussion and analysis of the financial
condition and results of operations for the first quarter of fiscal 2009 of
Discovery Air Inc. (the "Corporation" or "Discovery") should be read in
conjunction with the unaudited interim consolidated financial statements and
related notes of the Corporation for the period ended April 30, 2008 included
herein and the annual audited consolidated financial statements and related
notes for the year ended January 31, 2008, which are available on SEDAR at
www.sedar.com.

    Business Profile

    Mission
    The mission of the Corporation is to create shareholder value by building
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.

    Organization structure
    The Corporation was incorporated on November 12, 2004 and has made the
following acquisitions consistent with the Corporation's mission.

    
    -   December 21, 2004    -  The Corporation acquired 50% of the
                                outstanding shares of Hicks & Lawrence
                                Limited ("H&L")

    -   August 16, 2005      -  The Corporation acquired the remaining 50% of
                                the outstanding shares of H&L.

    -   June 20, 2006        -  The Corporation acquired 100% of the
                                outstanding shares of Great Slave Helicopters
                                Ltd. ("GSHL").

    -   December 19, 2006    -  The Corporation acquired 100% of the
                                outstanding shares of Air Tindi Ltd. ("ATL").

    -   March 14, 2007       -  The Corporation, through H&L, purchased the
                                wheel division assets of Walsten Air Service
                                (1986) Ltd. ("Walsten").

    -   August 24, 2007      -  The Corporation acquired 100% of the
                                outstanding shares of Top Aces Inc. ("TAI").

    -   January 4, 2008      -  The Corporation acquired 100% of the
                                outstanding shares of Discovery Mining
                                Services Ltd. ("DMS").
    

    Discovery Air has recently appointed Mr. Chuck Parker as the Executive
Vice President of Northern Operations. Under the new organizational structure,
Mr. Parker will report to Discovery's Chief Executive Officer and the senior
management of GSHL, ATL and DMS will report directly to Mr. Parker. These
three companies share common markets and are therefore more likely to exploit
potential synergies and economies of scale that are available under common
leadership and direction.

    Operations
    Starting in fiscal 2009, for management purposes, the operations of the
Corporation are being segregated into two operating segments:

    1. Northern Services, being the operations of GSHL, ATL and DMS; and
    2. Government Services, being the operations of TAI and H&L.

    The Corporation has re-aligned the segment disclosure of its operations
with the objective of providing better insight into the Corporation's
performance, its prospects for future net cash flow and ultimately to allow
the readers to make a more informed assessment of the Corporation's results.
The revised segment disclosure is consistent with management's approach in
evaluating the Corporation's subsidiaries. In updating the segment
information, management assessed the economic characteristics of the
Corporation's subsidiaries, considering the more relevant variables such as
the type of customers that the operations service, and ultimately determined
that the revised segment better represents the commonalities of the operations
within their respective segment.
    The operations were previously segmented between Rotary Wing, which
included GSHL, and Fixed Wing, which included ATL, TAI, H&L and DMS.
    Non-segmented activities are classified as Corporate Support. The results
of operations for the Corporation's subsidiaries are included in the
Corporation's consolidated financial accounts from the date of acquisition.

    Northern Services Segment
    GSHL is a Northwest Territories-based helicopter company that provides
chartered air transport services throughout Northern Canada and several of the
Canadian provinces. It provides, on its own and in partnership with northern
Aboriginal groups, aviation services to private sector companies and
governments in areas such as mineral, base and precious metal 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 aviation company that provides
scheduled and chartered passenger and air cargo services to private sector
companies, governments and individuals in such areas as mineral, base and
precious metal exploration, oil and gas exploration and tourism. ATL also
provides air ambulance services throughout the Northwest Territories.
    DMS is a Northwest Territories-based company that provides remote
exploration camps, expediting, logistics and staking services to primarily
diamond and mineral exploration companies.

    Government Services Segment
    TAI is a Quebec-based aviation company that provides highly specialized
airborne training services to the Department of National Defence.
    H&L is an Ontario-based aviation company that provides air services to
niche markets in Ontario, primarily fire suppression and other transportation
services to the provincial government.

    Seasonality and quarterly fluctuations
    Seasonality and other factors can impact on the comparability of results
from one period to another.

    
    -   There is increased demand for the services provided by GSHL, H&L, ATL
        and DMS normally commencing in the spring and continuing through to
        the end of the summer.
    -   TAI's revenue generating opportunities are significantly higher in
        the February to June and September to November time periods. Though
        TAI revenues are relatively predictable over a twelve month period,
        they can vary substantially from month to month depending on weather
        conditions and its customer's priorities.
    -   The Corporation attempts to perform most major repairs and
        refurbishment during the slower periods of revenue generating
        potential. As well, repair and maintenance on aircraft are not
        incurred evenly throughout the year and the timing of expenses within
        a year may vary from one period to another.
    -   Weather conditions can have an impact on available flight hours from
        one period to another.
    -   The timing of an acquisition in relation to the above factors can
        have an impact on the comparability of results.
    

    As a result, the operations of the Corporation are subject to seasonal
and other variations that make comparability difficult. Operating results
therefore may 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.

    Strategy and Strengths

    The Corporation is an investment company. It invests in businesses that
provide aviation and aviation related services to customers in niche markets.
The Corporation's investment portfolio is currently comprised of companies
that provide fixed-wing and rotary-wing transport services as well as
logistics and remote operations management services.
    The Corporation will drive growth by continuing to seek and acquire
accretive high-quality niche aviation and aviation related service companies.
In identifying new acquisition opportunities, the Corporation will
consistently employ selection criteria that considers, among other factors,
sustainable growth potential, enduring competitive advantage, strong cash
flow, and the existence of a highly competent, trustworthy management team.
Growth will also be achieved organically from the Corporation's existing
operating companies through increased utilization of the existing fleet, fleet
expansion, introduction of new or expanded services and by entering into new
geographic markets that would benefit from the high level of service of the
Corporation's operating companies.
    Aviation services are delivered by the Corporation's subsidiaries.
Discovery Air Inc. at the corporate level has no day-to-day operational
responsibilities. It provides its subsidiaries with access to capital and
corporate services which include investor relations management, treasury
services, group financial reporting and accounting, corporate legal services,
public company administration, and 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's current investment portfolio is comprised of companies
whose success is fundamentally based upon strong customer service, a
reputation for quality and safety, a loyal customer base, a dominant position
in their markets, significant barriers to entry, and a minimum 20-year
successful business track record in the case of GSHL, ATL and H&L.
    GSHL and ATL provide an essential service to many of their customers as
access to, and movement at, the majority of their customers' locations are
only possible via aircraft. This includes the movement and transport of
people, freight, equipment, and essential supplies. TAI and H&L also provide
essential services to their customers in the form of cost-effective Government
outsourced aviation service solutions.

    Results of operations for the three-month periods ended April 30, 2008
    and April 30, 2007

    Revenue and Hours Flown

    The Corporation's revenue is primarily generated from rotary-wing and
fixed-wing transportation services that are delivered through its subsidiaries
and are largely driven by flight hours. The following graph provides monthly
consolidated flight hour information that assists in understanding the impact
of acquisitions on total flight hours and the relative seasonality of the
Corporation's flight operations.

    
                     Consolidated Flight Hours By Month

    -------------------------------------------------------------------------
                           FEB      MAR      APR      MAY      JUN      JUL
    -------------------------------------------------------------------------
    Fiscal 2009           3,077    4,847    4,441        -        -        -
    -------------------------------------------------------------------------
    Fiscal 2008           2,698    4,226    4,646    8,068    9,231   12,535
    -------------------------------------------------------------------------
    Fiscal 2007               -        -        -      667    5,231   10,197
    --------------------------------------------------------------------------


    -------------------------------------------------------------------------
                           AUG      SEP      OCT      NOV      DEC      JAN
    -------------------------------------------------------------------------
    Fiscal 2009               -        -        -        -        -        -
    -------------------------------------------------------------------------
    Fiscal 2008          12,351    7,982    4,794    4,064    2,163    2,396
    -------------------------------------------------------------------------
    Fiscal 2007           9,096    6,411    2,542    1,321    1,151    2,410
    -------------------------------------------------------------------------

    Consolidated
    Revenues were $30.8 million for the current quarter, compared to
$16.1 million for the same period last year. The year over year increase in
revenues of $14.7 million or 91%, can be summarized as follows, in millions of
dollars:

    Incremental revenues from TAI & DMS which would
     not be reflected in the comparative results                       $11.7
    Net increase in revenues from businesses reflected
     in the comparative results (GSHL, ATL & H&L)                      $ 3.0
                                                                      -------
                                                                       $14.7

    Hours flown for the current quarter were 12,365 compared to 11,570 for the
same period last year. The year over year increase in hours flown of 795 hours
or 7%, can be summarized as follows:

    Incremental hours from TAI not reflected
     in the comparative results                                        1,158
    Net decrease in hours from businesses reflected
     in the comparative results (GSHL, ATL & H&L)                       (363)
                                                                      -------
                                                                         795
    

    TAI, acquired on August 24, 2007 and DMS, acquired on January 4, 2008,
collectively contributed to 38% of the total revenues earned in the quarter.
The Corporation also achieved strong organic growth of 19% from GSHL, ATL &
H&L collectively, despite a decrease in flight hours from these operations.
This was due to a favourable mix in aircraft use where higher rate aircraft
saw increased utilization despite an overall decline in flight hours. The year
over year revenue increase was also attributed to increased flight hour rates
at GSHL, ATL and H&L.
    The following is a summary of Northern Services and Government Services
segment hours and revenues for the comparative period.

    
    -------------------------------------------------------------------------
                           Flight Hours By Segment

                                                  for the three months ended
                                                 ----------------------------
                                                     April 30      April 30
                                                       2008          2007
                                                 ----------------------------
    Government Services                                  1,510           226
    Northern Services                                   10,855        11,344
                                                 ----------------------------
    Total                                               12,365        11,570
                                                 ----------------------------
                                                 ----------------------------

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


    -------------------------------------------------------------------------
                             Revenues By Segment
                               (in thousands)

                                                  for the three months ended
                                                 ----------------------------
                                                     April 30      April 30
                                                       2008          2007
                                                 ----------------------------
    Government Services                             $   10,206    $      330
    Northern Services                                   20,541        15,674
                                                 ----------------------------
    Total                                           $   30,747    $   16,004
                                                 ----------------------------
                                                 ----------------------------

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


    Northern Services segment
    The Northern Services segment flew 10,855 hours generating revenues of
$20.5 million for the current quarter, compared to 11,344 hours generating
revenues of $15.7 million in the comparative period last year. The segment's
31% year over year growth in revenues were attributed to increased flight hour
rates, a favourable shift to higher rate aircraft and the inclusion of the
operation of DMS, contributing to 10% of the segment's total revenues earned
in the quarter. GSHL and ATL's combined revenues were higher by $2.8 million
or 18% in the quarter compared to the same period last year, despite a 4%
decrease in overall flight hours in the quarter compared to the same period
last year. GSHL's 32% drop in light lift aircraft flight hours was offset by a
17% increase in intermediate and medium lift aircraft flight hours in the
quarter compared to the same period last year. Similarly for the operations of
ATL, a 16% decline in flight hours for their smaller aircraft fleet was offset
by a 40% increase in flight hours from their larger aircraft fleet in the
quarter compared to the same period last year.

    Government Services segment
    The Government Services segment flew 1,510 hours generating revenues of
$10.2 million for the current quarter, compared to 226 hours generating
revenues of $330,000 in the comparative period last year. While H&L saw slight
incremental growth this quarter compared to the same period last year,
substantially all of the year over year increase in this segment was
attributed to the results of TAI, which was acquired on August 24, 2007.

    Operating Expenses

    Consolidated
    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 included in
maintenance costs and 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 operating expenses
contain both a fixed and variable cost component.
    Operating expenses were $28.4 million for the current quarter, compared
to $16.9 million for the same period last year. Of the $11.5 million year over
year increase, $6.6 million was attributed to the inclusion of the operating
expenses of TAI and DMS, which due to the timing of their acquisition would
not have factored in prior year's results. The remaining $4.9 million variance
related to a general increase in operating expenses in the operations of GSHL,
ATL and H&L. The more notable increase in operating expenses was related to
wage and maintenance costs for these operations.
    In keeping with the Corporation's vision to align the interest of
employees and shareholders, the Corporation granted 381,350 stock options to
employees in the quarter. Non-cash stock-based compensation expense of
$404,000 was incurred in the quarter related to the vesting of options
granted, compared to $637,000 for the same period last year.

    Northern Services segment
    The segment's operating expenses for the quarter were $20.4 million,
compared to $14.5 million for the same period last year. The operating
expenses as a percentage of revenues increased by 7% in the current quarter
compared to the same period last year. The increase in operating expenses and
the operating expenses as a percentage of revenues was largely attributed to
increased wage and maintenance costs in both GSHL and ATL. Recognizing the
scarcity of skilled pilots and maintenance staff, the operations in this
segment incurred higher compensation costs to retain existing skilled staff as
well as hire more skilled pilots and maintenance staff to meet the demands of
the upcoming peak season. GSHL in particular actively hired and trained more
new pilots and maintenance staff than in past years. They also started the
hiring process much earlier in the season than in past years in order to
ensure they secured sufficient skilled resources to meet the upcoming peak
season demand. To address the pilot shortage, GSHL initiated an in-house
program to hire a number of low-hour pilots to train and develop at GSHL, and
to eventually integrate into GSHL's operations once the training is complete.
While this has resulted in increased staffing costs year over year, GSHL
believes this to be a sound long term investment. GSHL has also incurred costs
related to developing their safety management system as required by Transport
Canada which has resulted in increased training and consulting costs. The
segment also incurred higher maintenance expense in the quarter compared to
the same period last year. The first quarter is traditionally a period when
the operations attempt to perform all their significant overhaul and
maintenance work in anticipation of the upcoming peak season. These costs can
fluctuate from period to period based on the needs of the aircraft and are not
necessarily tied to flight hours.

    Government Services segment
    The segment's operating expenses for the quarter were $6.6 million,
compared to $919,000 for the same period last year. Consistent with this
segment's revenue, a significant portion of the segment's operating expense in
the quarter and variance from the same period last year is related to the
addition of TAI. H&L's operating expenses in the quarter were higher compared
to the same period last year, which was in part due to the prior period's
operating expense only reflecting Walsten's results since acquisition on
March 14, 2007.

    EBITDA and EBITDAR (see Non-GAAP Measures)

    Consolidated
    EBITDA was $2.3 million for the current quarter, compared to EBITDA loss
of $805,000 for the same period last year. While the increased revenues from
organic growth contributed to the increased EBITDA, the larger contribution
came from the inclusion of the results of TAI and DMS. Dampening the EBITDA
were the increased operating expenses incurred at GSHL, ATL and H&L.
    EBITDAR was $4.7 million for the quarter, compared to $1.1 million for
the same period last year. The aircraft lease cost for the quarter was
$2.3 million compared to $1.9 million for the same period last year, with the
variance largely attributed to the addition of TAI, which lease their Westwind
aircraft, and GSHL increasing the utilization of leased hours in their
operation.

    Northern Services segment
    The Northern Services segment had EBITDA of $133,000 for the quarter,
compared to $1.2 million for the same period last year. The EBITDA margin was
1% in the quarter compared to 8% in the same period last year. The decline in
EBITDA and EBITDA margin was due largely to the higher wage and maintenance
cost incurred in the current quarter compared to the same period last year.
EBITDAR for the quarter was $2.2 million compared to $3.1 million for the same
period last year.

    Government Services segment
    The Government Services segment had EBITDA of $3.6 million for the
quarter compared to EBITDA loss of $589,000 for the same period last year.
EBITDAR for the quarter was $3.9 million compared to EBITDAR loss of $589,000
for the same period last year. Both EBITDA and EBITDAR were positively
impacted by the results of TAI in the quarter since the prior year comparative
only included the low season results of H&L.

    Financing charges

    Financing charges were $3.0 million for the quarter, compared to
$1.9 million for the same period last year. The increased financing charges
are reflective of the increased debt levels the Corporation has assumed in
growing the business through acquisitions and investing in new aircraft. The
year over year increase in financing charges can be attributed to incremental
debt incurred related to the acquisition of TAI, DMS and the purchase of three
new aircraft.

    Amortization Expenses

    Amortization of buildings and equipment
    Amortization of building and equipment expense was $2.0 million for the
current quarter, compared to $1.8 million for the same period last year. The
increased amortization of buildings and equipment in the current quarter was
due largely to the inclusion of assets acquired from TAI and DMS.

    Amortization of intangible assets
    Amortization of intangible assets expense was $1.1 million for the
current quarter, compared to $503,000 for the same period last year. The
amortization of intangible assets relates to the periodic expensing of a
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 significant increase in the amortization of
intangible assets was due to the amortization of the intangible assets
recorded on the acquisition of TAI and DMS. The portion of the purchase price
attributed to customer relationships for TAI and DMS were $18.2 million and
$1.4 million respectively. While these assets are being amortized in
accordance with Canadian generally accepted accounting principles, the
Corporation has no reason to believe that these customer relations will not be
of continuing value to the Corporation.

    Income Taxes

    Income tax recoverable was $1.2 million for the current quarter, compared
to $1.5 million for the same period last year. The Corporation's statutory
rate for the quarter was approximately 32%, compared to approximately 34%. The
effective rate applied in calculating the current quarter income tax
recoverable was approximately 30% due to the non-deductibility of certain
expenses such as stock-based compensation expense.

    Liquidity and Financial Resources

    Operating activities
    As expected, due to the first quarter of the Corporation being a
seasonally slow period for many of its subsidiaries, the operation reflects a
negative cash position from operations. The net cash outflow from operating
activities was $9.6 million for the current quarter, compared to $4.4 million
for the same period last year. The current quarter cash flow from operations
was impacted by an $11.3 million negative change in non-cash working capital
position since the start of the fiscal year compared to a $2.4 million
negative change in non-cash working capital position for the same period last
year. The significant year over year variance in the change in non-cash
working capital position is due to the inclusion of the operations of TAI and
DMS. Both operations significantly increased their accounts receivable from
the start of the year, which is normal as these operations start to build up
into their peak season.
    After-tax operating cash flow was $1.7 million for the quarter or $0.01
per share compared to a negative after-tax operating cash flow of $2.0 million
or $(0.02) per share for the same period last year (see Non-GAAP Measures).
The year over year increase in the after-tax operating cash flow of the
Corporation is largely due to the inclusion of the operating results of TAI
and DMS in the current year.
    The Corporation's working capital balance at the end of the quarter was
in a negative position of $13.2 million compared to a positive position of
$16.2 million as at January 31, 2008. The significant variance in working
capital balance from January 31, 2008 was due to the classification change
from long-term to current liabilities of the $33.0 million debt instrument
incurred to acquire TAI which is scheduled to be repaid in February 2009. The
Corporation is in discussion with several parties regarding the refinancing of
this debt. The prior year working capital balance also reflected residual cash
from the issuance of convertible debentures in December 2006 which was used to
fund subsequent growth.
    The current ratio was 0.79 compared to 1.78 as at January 31, 2008. Again
the current ratio was largely impacted by the classification of the TAI
acquisition debt of $33.0 million as a current liability in the current year.
Excluding this debt from current liabilities would result in a current ratio
of 1.70.
    The Corporation believes it has sufficient working capital to meet its
current and future operating requirements based on its expected working
capital position and cash generated from operations in the coming quarters. In
addition, the Corporation has various committed and uncommitted credit
facilities available as a source for any short-term financing requirements
which could arise in relation to the seasonality of its revenue patterns as is
the case in the current quarter. The Corporation does not expect any
significant changes to its future working capital requirements other than
possible changes caused by a large acquisition or capital expenditures related
to fleet expansion. These transactions are consistent with the Corporation's
strategy and it is expected that these transactions would be largely financed
by some combination of debt and equity.
    Other than $33.0 million in term debt that matures in February 2009, the
Corporation is not aware of any balance sheet conditions, income items or cash
flow items that could materially impact liquidity. There is also no liquidity
concern associated with the Corporation's financial instruments.

    Investing activities
    The Corporation had a net cash outlay of $9.8 million related to
investing activities for the current quarter, compared to $16.5 million for
the same period last year. During the current quarter, the investing
activities related to fleet expansion and capitalized overhaul and maintenance
cost. The fleet expansion included the acquisition of two intermediate
helicopters, progress funding related to the purchase of eight additional
Alpha jets, and a fixed wing, twin-engine turbo-prop airplane. The prior year
comparative reflects the acquisition of Walsten assets for $5.3 million and
$11.2 million in fleet expansion and capitalized overhaul and maintenance
cost. The Corporation has committed to acquire eight Alpha jets and related
parts and inventory totalling $12.9 million during the year. Other than
routinely scheduled maintenance and overhaul of the Corporation's existing
fleet, the Corporation does not expect any significant overhaul or maintenance
outlay in the foreseeable future.

    Financing activities
    The Corporation obtained new debt totalling $10.0 million during the
current quarter largely to finance aircraft and capital equipment purchases.
The Corporation obtained new debt totalling $12.2 million for the same period
last year, also to finance new aircraft as well as to finance the acquisition
of the Walsten assets.
    The Corporation made scheduled debt repayments totalling $1.6 million
during the current quarter. The Corporation made scheduled debt repayments of
$1.9 million for the same period last year.
    The Corporation did not receive cash related to the issue of common
shares in the current quarter. The Corporation received $262,000 in cash
related to the issue of common shares for the same period last year.

    Debt Financing
    In February 2008 the Corporation entered into a $21.5 million term loan
to refinance existing TAI term debt and the purchase of additional aircraft,
spare engines and aircraft parts. The principal amount of the loan is
repayable in monthly installments of $256,000 commencing in February 2008 and
ending in January 2015. The term debt bears an interest rate of the lender's
floating base rate plus 3.25% per annum. The loan is secured by a debenture
over all the assets of TAI, subject to a priority interest provided to an
operating lender over TAI's accounts receivable. As at April 30, 2008,
$8.6 million has been drawn under this banking facility. There are various
covenants, including financial covenants, which the Corporation is required to
comply with. The Corporation is in compliance with these covenants.
    In January 2008, the Corporation arranged a $75.0 million evergreen term
debt facility to replace the fleet debt in H&L, GSHL and ATL as well as to
finance future capital expenditures. The full availability under this credit
facility is subject to certain conditions being met. At the end of the current
quarter the Corporation had approximately $52.6 million available to it and
drawn from this facility to refinance existing credit facilities and to
finance additional aircraft purchases. Assuming the Corporation continues to
meet all conditions over the term of the evergreen facility, the Corporation
is only obligated to repay on a regular basis, the interest related to this
facility, thus allowing the Corporation greater flexibility to reinvest the
cash generated from operations to continue growing the business. Based on a
5 year term, advances up to $50.0 million bear an interest rate of 30 day BAs
plus 2.5% and advances in excess of $50.0 million bear an interest rate of
30 day BAs plus 3.0%. The Corporation has provided a general security
agreement over its assets and the assets of GSHL, ATL and H&L to secure this
credit facility. The debt is an evergreen facility which currently only
requires the repayment of interest over the term of the debt. On each
anniversary date the lender has the option to convert the evergreen facility
to an amortizing debt with the principal balance at the time amortized over a
10 year period. There are various covenants, including financial covenants,
which the Corporation is required to comply with. The Corporation is in
compliance with these covenants.
    The Corporation has a 364-day committed revolving banking facility which
consists of an operating line of credit to a maximum of $15 million that
increases by an additional $10 million during the Corporation's peak operating
season, from April 1 to November 30. The banking facility bears an interest
rate of prime plus 0.50% and is secured by a general security agreement over
the assets of Discovery Air Inc., GSHL, ATL and H&L. At April 30, 2008,
$6.4 million has been drawn under this banking facility. There are various
covenants, including financial covenants that the Corporation is required to
comply with. The Corporation is in compliance with these covenants.
    TAI has a banking facility which consists of an operating line of credit
to a maximum of $2.75 million, bearing interest at prime plus 0.50%. This
facility is secured by a general security agreement which provides a first
charge over accounts receivable and inventory, and a floating charge over all
other assets subject to permitted encumbrances. At April 30, 2008,
$1.2 million has been drawn under this banking facility.
    H&L has available to it a revolving banking facility to a maximum of
$1.5 million, bearing interest at prime plus 0.25%, whereby eligible accounts
receivables are pledged at face value. The facility is secured by specific
government receivables. At April 30, 2008, there were no amounts outstanding
under this banking facility.
    The Corporation has $33.0 million of term debt that matures on
February 1, 2009. As noted in the operating activities, this debt has been
classified as a current portion of long-term debt on its balance sheet as at
April 30, 2008. The Corporation has initiated discussions with various parties
regarding the refinancing of this debt.

    Shareholders' Equity

    Shareholders' equity at April 30, 2008, was $199.6 million compared to
$153.4 million as at April 2007, with the increase attributable to the
retention of earnings, the issuance of Class A and Class B common shares on
the acquisition of DMS and TAI, the exercise of options and warrants, and the
fair value attributable to warrants issued. At April 30, 2008, the Corporation
had 134,522,805 Class A common shares outstanding and 681,354 Class B common
shares outstanding compared to 110,900,019 Class A common shares outstanding
and nil Class B common shares outstanding as at April 30, 2007. The detail of
the 23.6 million increase in Class A common shares issued during the most
recent 12 month period is as follows: 19.3 million Class A common shares
issued as partial consideration for the acquisition of TAI, 4.3 million
Class A common shares issued as partial consideration for the acquisition of
DMS, and 20,000 Class A common shares issued on the exercise of options.
681,384 Class B common shares were issued as partial consideration for the
acquisition of TAI.
    There were 1,178,568 common share purchase warrants outstanding at
April 30, 2008. The holders of these 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 7,494,550 (2008 - 5,356,050) common share options outstanding
at April 30, 2008. For the quarter ended April 30, 2008, 381,350 common share
options were granted. For the current quarter, salary expense and an addition
to contributed surplus of $404,000 (2008 - $637,000) was recorded relating to
the vesting of options granted.
    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 5 of the interim consolidated financial statements.

    Updated Share Information

    At June 11, 2008, there were 134,461,555 Class A common shares
outstanding and 742,604 Class B common shares outstanding. At the same date,
there were 7,494,550 common share options outstanding and 1,178,568 common
share purchase warrants outstanding.

    Related Party Transactions

    At April 30, 2008, the Corporation had total indebtedness, including
accrued interest, of $19.6 million (2008 - $18.7 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 quarter ended April 30, 2008, interest
expense on this debt totaled $227,000 (2008 - $287,000).

    Change in Accounting Policies

    Financial instruments - presentation and disclosure
    CICA 3862, Financial Instruments - Disclosure, and CICA 3863, Financial
Instruments Presentation, effective for the Corporation on February 1, 2008,
revise the current standards on financial instrument disclosure and
presentation, and place an increased emphasis on disclosures regarding the
risks associated with both recognized and unrecognized financial instruments
and how these risks are managed. CICA 3863 also establishes standards for
presentation of financial instruments and non-financial derivatives and
provides additional guidance with classification of financial instruments,
from the perspective of the issuer, between liabilities and equity. There was
no impact to the previously reported financial statements as a result of the
implementation of these new standards.

    Inventories
    In May 2007, the Accounting Standards Board issued Handbook Section 3031,
Inventories, which supersedes Handbook Section 3030 and is effective
February 1, 2008. The standard introduces significant changes to the
measurement and disclosure of inventory. The most significant change for the
Corporation is the requirement to measure inventories at the lower of cost and
net realizable value, as opposed to lower of cost and replacement cost. The
implementation of this standard had no material impact on the Corporation's
financial results or condition.

    Capital disclosures
    CICA 1535, Capital Disclosures, effective for the Corporation on
February 1, 2008, establishes guidelines for the disclosure of information
regarding an entity's capital and how it is managed including enhanced
disclosure requirements with respect to the objectives, policies and processes
for managing capital.
    Additional information on the application of the above Handbook Sections
is contained in the interim consolidated financial statements for the period
ended April 30, 2008.

    Future Changes in Accounting Policies

    Goodwill and Intangible Assets
    Effective February 1, 2009, the Corporation will adopt the new Canadian
standard, Handbook Section 3064, Goodwill and intangible assets, which
replaces Handbook Section 3062, Goodwill and other intangible assets and
Section 3450, Research and development costs. The standard introduces guidance
for the recognition, measurement and disclosure of goodwill and intangible
assets, including internally generated intangible assets. The standard also
harmonizes Canadian standards with IFRS. The Corporation is assessing the
impact of the new standard on its consolidated financial statements.

    Subsequent event

    Normal Course Issuer Bid
    On June 10, 2008, the Corporation filed a notice with the Toronto Stock
Exchange ("Exchange") to make a normal course issuer bid ("NCIB") allowing the
Corporation to purchase for cancellation up to 5,000,000 of its Class A common
voting shares ("common shares") representing 3.72% of the 134,461,555 issued
and outstanding common shares as at June 11, 2008. Subject to one block
purchase per calendar week allowed pursuant to the rules of the Exchange, the
maximum number of common shares to be acquired under the NCIB each day is
11,670 common shares. The Corporation may buy back common shares from time to
time during the next twelve months commencing June 12, 2008 and ending
June 11, 2009, or such earlier date as the Corporation may complete its
purchases pursuant to the Notice of Intention. Any purchase made under the
NCIB will be effected through the facilities of the Exchange and in accordance
with the policies and rules of the Exchange.

    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 treated as operating expenses), gain on
disposal of land, buildings and equipment, and non-controlling interest. As is
common in the industry, the Corporation uses EBITDA as a supplemental
financial measure of its operational performance. Reference to "EBITDAR" is
EBITDA before aircraft lease cost. Management believes EBITDA and EBITDAR 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 loss before non-controlling interest
to EBITDA and EBITDAR.

    
                                                  for the three months ended
                                                 ----------------------------
                                                     April 30      April 30
    (thousands of dollars)                             2008          2007
    -------------------------------------------------------------------------
                                                   (unaudited)   (unaudited)

    Loss before non-controlling interest            $   (2,663)   $   (3,586)
    Income tax recovery                                 (1,164)       (1,466)
    Financing charges                                    3,025         1,919
    Amortization                                         3,117         2,328
    -------------------------------------------------------------------------

    EBITDA                                          $    2,315    $     (805)
    -------------------------------------------------------------------------

    Aircraft lease expenses                              2,342         1,887
    -------------------------------------------------------------------------

    EBITDAR                                         $    4,657    $    1,082
    -------------------------------------------------------------------------
    

    References to "after-tax operating cash flow" are to net earnings (loss)
adjusted for amortization, future income tax and other non-cash charges but is
not adjusted for changes in non-cash operating working capital. Management
believes after-tax operating cash flow is a strong supplemental financial
measure of the Corporation's ability to generate cash flow from its
operations. While the non-cash working capital position is monitored by
management, it is excluded in the after-tax operating cash flow calculation
due to the high variability of the working capital components attributed to
the high seasonality and the high rate of growth of the Corporation's
operations.
    The following is a reconciliation of net loss to after-tax operating cash
flow.

    
                                                  for the three months ended
                                                 ----------------------------
                                                     April 30      April 30
    (thousands of dollars)                             2008          2007
    -------------------------------------------------------------------------
                                                   (unaudited)   (unaudited)

    Net loss                                        $   (2,700)   $   (3,581)
    Future income tax recovery                            (653)       (1,795)
    Stock-based compensation                               404           637
    Amortization of buildings and equipment
     and intangible assets                               3,117         2,205
    Amortization of rotable and
     overhauled components                               1,185           458
    Amortization of discount of long-term debt             321           120
    Non-controlling interest                                37            (5)
    -------------------------------------------------------------------------

    After-tax cash flow                             $    1,711    $   (1,961)
    -------------------------------------------------------------------------

    After-tax cash flow per share                   $     0.01    $    (0.02)
    -------------------------------------------------------------------------
    


    SEGMENTED INFORMATION

    The Corporation has two reportable business segments: Northern Services
and Government Services. These segments are differentiated by the market in
which the Corporation's aviation and related services operate in. The Northern
Services segment is represented by GSHL, ATL and DMS and Government Services
segment is represented by TAI and H&L. The Northern Services segment's primary
market is based on the activities in Northern Canada. This segment has a wide
customer base servicing companies in the business of mineral, base and
precious metal exploration and production, wildlife services, forest fire
suppression, oil and gas exploration, power line construction and maintenance,
aerial surveys exploration and tourism. Entities in the Government Services
segment provide niche services primarily focused on government entities.
    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, 2008
    -------------------------------------------------------------------------
                                Northern   Government   Corporate
                                Services    Services     Support       Total
    -------------------------------------------------------------------------

    Revenue                    $  20,541   $  10,206   $       7   $  30,754

    Operating expenses            20,408       6,569       1,462      28,439
    Amortization                   2,086       1,015          16       3,117
    Loss from operations before
     undernoted items             (1,953)      2,622      (1,471)       (802)
    Financing costs                                                    3,025
    Income taxes                                                      (1,164)
    Minority interest                                                     37
    -------------------------------------------------------------------------
    Net loss                                                          (2,700)
    -------------------------------------------------------------------------
    Total assets               $ 288,479   $ 103,801   $   1,385   $ 393,665
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (thousands of dollars)       for the three months ended April 30, 2007
    -------------------------------------------------------------------------
                                Northern   Government   Corporate
                                Services    Services     Support       Total
    -------------------------------------------------------------------------

    Revenue                    $  15,674   $     330   $      63   $  16,067

    Operating expenses            14,480         919       1,473      16,872
    Amortization                   2,214         114           -       2,328
    Loss from operations before
     undernoted items             (1,020)       (703)     (1,410)     (3,133)
    Financing costs                                                    1,919
    Income taxes                                                      (1,466)
    Minority interest                                                     (5)
    -------------------------------------------------------------------------
    Net loss                                                          (3,581)
    -------------------------------------------------------------------------
    Total assets               $ 268,306   $  14,697   $   3,695   $ 286,698
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Segmented breakdown of EBITDA and EBITDAR

    -------------------------------------------------------------------------
    (thousands of dollars)       for the three months ended April 30, 2008
    -------------------------------------------------------------------------
                                Northern   Government   Corporate
                                Services    Services     Support       Total
    -------------------------------------------------------------------------

    Revenue                    $  20,541   $  10,206   $       7   $  30,754
    Operating expenses            20,408       6,569       1,462      28,439
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDA                     $     133   $   3,637   $  (1,455)  $   2,315
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Aircraft lease expenses        2,092         250           -       2,342
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDAR                    $   2,225   $   3,887   $  (1,455)  $   4,657
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (thousands of dollars)       for the three months ended April 30, 2007
    -------------------------------------------------------------------------
                                Northern   Government   Corporate
                                Services    Services     Support       Total
    -------------------------------------------------------------------------
    Revenue                    $  15,674   $     330   $      63   $  16,067
    Operating expenses            14,480         919       1,473      16,872
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDA                     $   1,194   $    (589)  $  (1,410)  $    (805)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Aircraft lease expenses        1,887           -           -       1,887
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    EBITDAR                    $   3,081   $    (589)  $  (1,410)  $   1,082
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    SUMMARY OF QUARTERLY RESULTS

    (thousands of
     dollars except
     per share
     amounts)              2009                       2008
    ------------------ ---------- -------------------------------------------
                            Q1         Q4         Q3         Q2         Q1
    Results of
     operations:
    Total revenue      $  30,754  $  19,673  $  41,612  $  43,583  $  16,067
    Operating expenses    28,439     23,857     26,900     24,855     16,872
                       ---------- -------------------------------------------
    EBITDA                 2,315     (4,184)    14,712     18,728       (805)

    Amortization           3,117      3,047      2,590      1,432      2,328
    Financing costs        3,025      3,473      2,771      2,127      1,919

    Income (loss)
     before income
     taxes and
     non-controlling
     interest             (3,827)   (10,704)     9,351     15,169     (5,052)
    Income tax
     provision
     (recovery)           (1,164)    (5,849)     3,327      4,965     (1,466)
    Non-controlling
     interest                 37         24        122        147         (5)
                       ---------- -------------------------------------------

    Net earnings
     (loss)            $  (2,700) $  (4,879) $   5,902  $  10,057  $  (3,581)
                       ---------- -------------------------------------------
    Earnings (loss)
     per share
      - basic          $   (0.02) $   (0.04) $    0.05  $    0.09  $   (0.03)
      - diluted        $   (0.02) $   (0.04) $    0.05  $    0.09  $   (0.03)



    (thousands of
     dollars except
     per share
     amounts)             2007(*)         2006
    ------------------ ---------- ---------------------
                            Q1         Q4         Q3
    Results of
     operations:
    Total revenue      $   7,114  $  22,133  $  18,111
    Operating expenses    12,412     13,372     10,110
                       ---------- ---------------------
    EBITDA                (5,298)     8,761      8,001

    Amortization           1,510      1,326        493
    Financing costs        1,366        929        423

    Income (loss)
     before income
     taxes and
     non-controlling
     interest             (8,174)     6,506      7,085
    Income tax
     provision
     (recovery)           (3,616)     2,041      2,643
    Non-controlling
     interest                (47)       200         32
                       ---------- ---------------------

    Net earnings
     (loss)            $  (4,511) $   4,265  $   4,410
                       ---------- ---------------------
    Earnings (loss)
     per share
      - basic          $   (0.05) $    0.05  $    0.08
      - diluted        $   (0.05) $    0.05  $    0.07

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

    The business of the Corporation follows a seasonal pattern with the
lowest revenues occurring from November to April. Therefore, the Corporation's
results vary from quarter to quarter and results for an interim period are not
necessarily indicative of the results that may be expected for a full year.

    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 25, 2008, which can be found on SEDAR at
www.sedar.com.

    DISCLOSURE CONTROLS AND INTERNAL CONTROLS

    The Corporation's Chief Executive Officer and Chief Financial Officer
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, 2008. Their assessment led them to conclude that
these disclosure procedures and controls are adequate and effective to ensure
that material information relating to the Corporation and its subsidiaries
would have been known to them.
    The Chief Executive Officer and the Chief Financial Officer 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 the consolidated financial statements for external
purposes in accordance with Canadian generally accepted accounting principles.
The Corporation's Chief Executive Officer and Chief Financial Officer have
evaluated the design of the Corporation's ICFR as at April 30, 2008 and
believe the design to be sufficient to provide such reasonable assurance.
There were no other 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.
    Additional information relating to the Corporation, including the
Corporation's Annual Information Form can be found on SEDAR at www.sedar.com.

    Dated: June 11, 2008

    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.

    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.
    Interim Consolidated Balance Sheets
    (thousands of dollars)
                                                      April 30     January 31
                                                        2008          2008
                                                    -----------   -----------
                                                    (unaudited)     (audited)

    Assets
    Current assets:
      Cash                                        $        295  $      3,756
      Accounts receivable                               24,826        15,212
      Inventory                                         15,924        14,731
      Prepaid expenses and other                         7,252         3,323
                                                  ------------  -------------
                                                        48,297        37,022

    Land, buildings and equipment                      142,515       135,906

    Intangible assets                                   43,410        44,528

    Goodwill                                           159,443       159,443
                                                  ------------  -------------
                                                  $    393,665  $    376,899
                                                  ------------  -------------
                                                  ------------  -------------

    Liabilities and Shareholders' Equity
    Current liabilities:
      Bank indebtedness (note 4)                  $      7,543  $          -
      Accounts payable and accrued liabilities          14,041        10,094
      Income taxes payable (note 8)                          -           531
      Current portion of long-term debt (note 3)        39,869        10,168
                                                  ------------  -------------
                                                        61,453        20,793
                                                  ------------  -------------

    Long-term debt (note 3)                            102,919       123,901

    Future income taxes                                 28,016        28,669

    Non-controlling interest                             1,706         1,669

    Shareholders' equity
      Share capital (note 5)                           184,968       184,968
      Contributed surplus                                6,093         5,689
      Retained earnings                                  8,510        11,210
                                                  ------------  -------------
                                                       199,571       201,867
                                                  ------------  -------------

                                                  $    393,665  $    376,899
                                                  ------------  -------------
                                                  ------------  -------------
    Commitments (note 11)
    Subsequent event (note 13)

    See accompanying notes to consolidated financial statements.



    DISCOVERY AIR INC.
    Interim Consolidated Statements of Loss
    (thousands of dollars, except loss per share)

                                                   for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
                                                        2008          2007
                                                  ------------  -------------
                                                    (unaudited)   (unaudited)

    Revenue                                       $     30,754  $     16,067
    Operating expenses                                  28,439        16,872
                                                  ---------------------------
                                                         2,315          (805)

    Financing charges                                    3,025         1,919
    Amortization of buildings and equipment              1,999         1,825
    Amortization of intangible assets                    1,118           503
                                                  ---------------------------
                                                         6,142         4,247
                                                  ---------------------------
    Loss before income taxes and non-controlling
     interest                                           (3,827)       (5,052)

    Income tax recovery (note 8)                        (1,164)       (1,466)
                                                  ---------------------------

    Loss before non-controlling interest                (2,663)       (3,586)

    Non-controlling interest                                37            (5)
                                                  ---------------------------

    Net loss                                      $     (2,700) $     (3,581)
                                                  ---------------------------
                                                  ---------------------------

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


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

    Weighted average number of common shares       135,204,000   109,535,000
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements.



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

                                                   for the three months ended
                                                   --------------------------
                                                      April 30     April 30
                                                        2008          2007
                                                   --------------------------
                                                    (unaudited)   (unaudited)
    Share capital (note 5)

    Class A common shares:
    Outstanding, beginning of period                $  184,968    $  148,695
    Issued on exercise of warrants                           -           262
                                                   --------------------------
    Outstanding, end of period                      $  184,968    $  148,957

    Contributed surplus

    Balance, beginning of period                    $    5,689    $    3,664
    Fair value of options granted                          404           637
                                                   --------------------------
    Balance, end of period                          $    6,093    $    4,301
                                                   --------------------------

                                                   --------------------------
    Total share capital and contributed surplus     $  191,061    $  153,258
                                                   --------------------------
                                                   --------------------------
    Retained earnings

    Retained earnings, beginning of period          $   11,210    $    3,711
    Net loss                                            (2,700)       (3,581)
                                                   --------------------------
    Retained earnings, end of period                $    8,510    $      130
                                                   --------------------------
                                                   --------------------------

    See accompanying notes to consolidated financial statements.



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

                                                   for the three months ended
                                                   --------------------------
                                                      April 30      April 30
                                                        2008          2007
                                                   --------------------------
                                                    (unaudited)   (unaudited)
    Cash provided by (used in):

    Operations:
    Net loss                                        $   (2,700)   $   (3,581)
    Items not involving cash:
      Future income tax recovery                          (653)       (1,795)
      Stock-based compensation                             404           637
      Amortization of buildings and equipment and
       intangible assets                                 3,117         2,205
      Amortization of rotable and overhauled
       components                                        1,185           458
      Amortization of discount of long-term debt           321           120
      Non-controlling interest                              37            (5)
    Change in non-cash operating working capital
     (note 6)                                          (11,320)       (2,416)
                                                   --------------------------
                                                        (9,609)       (4,377)
                                                   --------------------------
    Investing:
    Land, buildings and equipment                       (9,927)      (11,243)
    Proceeds on disposal of asset, net                     134             -
    Acquisition of subsidiary operations                     -        (5,258)
                                                   --------------------------
                                                        (9,793)      (16,501)
                                                   --------------------------
    Financing:
    Proceeds from operating line of credit                7,543            -
    Proceeds from long-term debt                          9,972       12,193
    Financing costs                                          (9)           -
    Repayment of long-term debt                          (1,565)      (1,926)
    Net proceeds from issue of common shares                  -          262
                                                   --------------------------
                                                         15,941       10,529
                                                   --------------------------

    Decrease in cash                                     (3,461)     (10,349)

    Cash, beginning of period                             3,756       17,634
                                                   --------------------------

    Cash, end of period                             $      295    $    7,285
                                                   --------------------------
                                                   --------------------------

    Supplementary cash flow information:
      Interest paid during the period               $    1,863    $    1,105
      Income taxes paid during the period           $       26    $    1,361


    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, 2008

    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 wholly-owned subsidiaries Great Slave
Helicopters Ltd. ("GSHL"), Air Tindi Ltd. ("ATL"), Top Aces Inc. ("TAI"),
Hicks & Lawrence Limited ("H&L") and Discovery Mining Services Ltd. ("DMS").
    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 most recent quarter and its comparative period are not
necessarily indicative of the results that may be expected for a full year. In
addition, repair and maintenance on aircraft are not incurred evenly
throughout the year and the timing of such expenses within a year may vary
from one year to another.
    GSHL is a helicopter company that, in partnership with Aboriginal groups,
operates a fleet of over 70 helicopters and provides services throughout
Northern Canada and several of the Canadian provinces to private sector
companies and governments 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 24 fixed wing aircraft offering
scheduled and chartered passenger and cargo services, as well as air ambulance
services, in Northern Canada. It has a diversified customer base that includes
major diamond and mineral exploration and mining companies and the Governments
of Canada and the Northwest Territories.
    TAI is an approved supplier of airborne training services to the
Department of National Defence. TAI provides a variety of military training
ranging from simulated combat to target tow with a fleet of 12 aircraft
located throughout Canada.
    H&L is an Ontario-based aviation company that operates 30 aircraft
focused on providing air services to niche markets in the Province of Ontario.
H&L provides aerial forest fire services to the Province of Ontario with its
fleet of 27 aircraft and flight operations support and aircraft maintenance
bases throughout Northern Ontario. H&L also provides air charter services
using 3 turbine aircraft to the provincial government and various other
corporate entities which conduct business in Northern Ontario.
    DMS is a provider of remote exploration camps, expediting, logistics and
staking to diamond and mineral exploration companies. Based in Northwest
Territories, DMS conducts operations in the Northwest Territories, Nunavut,
Northern Alberta and Northern Saskatchewan.

    
    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
        year ended January 31, 2008.

        These interim financial statements follow the same accounting
        policies as the most recent annual consolidated financial statements
        except for the following changes in accounting policies:

        (a)   Financial instruments - presentation and disclosure

        CICA 3862, Financial Instruments - Disclosure, and CICA 3863,
        Financial Instruments Presentation, effective for the Corporation on
        February 1, 2008, revise the current standards on financial
        instrument disclosure and presentation, and place an increased
        emphasis on disclosures regarding the risks associated with both
        recognized and unrecognized financial instruments and how these risks
        are managed. CICA 3863 also establishes standards for presentation of
        financial instruments and non-financial derivatives and provides
        additional guidance with classification of financial instruments,
        from the perspective of the issuer, between liabilities and equity.
        There was no impact to the previously reported financial statements
        as a result of the implementation of these new standards. The new
        disclosure requirements are presented in note 10.

        (b)   Inventories

        In May 2007, the Accounting Standards Board issued Handbook Section
        3031, Inventories, which supersedes Handbook Section 3030 and is
        effective February 1, 2008. The standard introduces significant
        changes to the measurement and disclosure of inventory. The most
        significant change for the Corporation is the requirement to measure
        inventories at the lower of cost and net realizable value, as opposed
        to lower of cost and replacement cost. The implementation of this
        standard had no material impact on the Corporation's financial
        results or condition.

        (c)   Capital disclosures

        CICA 1535, Capital Disclosures, effective for the Corporation on
        February 1, 2008, establishes guidelines for the disclosure of
        information regarding an entity's capital and how it is managed
        including enhanced disclosure requirements with respect to the
        objectives, policies and processes for managing capital. The new
        disclosure requirements are presented in note 9.

    2.  Future changes in accounting policy:

        Goodwill and Intangible Assets

        Effective February 1, 2009, the Corporation will adopt the new
        Canadian standard, Handbook Section 3064, Goodwill and intangible
        assets, which replaces Handbook Section 3062, Goodwill and other
        intangible assets and Section 3450, Research and development costs.
        The standard introduces guidance for the recognition, measurement and
        disclosure of goodwill and intangible assets, including internally
        generated intangible assets. The standard also harmonizes Canadian
        standards with IFRS. The Corporation is assessing the impact of the
        new standard on its consolidated financial statements.

    3.  Secured debt arrangements:

        The scheduled principal repayment of the long-term debt over the next
        five years and thereafter is presented in note 10.

        In February 2008 the Corporation entered into a $21.5 million term
        loan to refinance existing TAI term debt and the purchase of
        additional aircraft, spare engines and aircraft parts. The principal
        amount of the loan is repayable in monthly installments of $256,000
        commencing in February 2008 and ending in January 2015. The term debt
        bears an interest rate of the lender's floating base rate plus 3.25%
        per annum. The loan is secured by a debenture over all the assets of
        TAI, subject to a priority interest provided to an operating lender
        over TAI's accounts receivable. As at April 30, 2008, $8.6 million
        has been drawn under this banking facility. Financing costs of
        $190,000 was incurred in obtaining the loan and will be expensed over
        the term of the loan.

        In January 2008, the Corporation entered into a $75.0 million
        revolving long-term debt agreement to finance certain of its fleet
        assets. The full availability under this credit facility is subject
        to certain conditions being met. At the end of the current quarter
        the Corporation had approximately $52.6 million available to it and
        drawn from this facility to refinance existing credit facilities and
        to finance additional aircraft purchases. Based on a 5 year term,
        advances up to $50.0 million bear an interest rate of 30 day BAs plus
        2.5% and advances in excess of $50.0 million bear an interest rate of
        30 day BAs plus 3.0%. The debt is an evergreen facility which only
        requires the repayment of interest over the term of the debt. On each
        anniversary date the lender has the option to convert the evergreen
        facility to an amortizing debt with the principal balance at the time
        amortized over a 10 year period. The loan is secured by a general
        security agreement over the assets of Discovery Air Inc., GSHL and
        its wholly-owned subsidiaries, ATL and H&L. The security structure
        provides a first charge over the aircraft owned by these subsidiaries
        and a secondary floating charge over all their other assets except
        real estate, subject to permitted encumbrances. Financing costs of
        $1.2 million, included in long-term debt, represent the unamortized
        cost of obtaining the term loan.

        In August 2007, the Corporation entered into a $33.0 million term
        loan agreement with a syndicate of lenders to finance a portion of
        the TAI business combination. The term loan has an effective rate of
        11.07% per annum and the principal balance is due on February 1, 2009
        and as a result reflected in current liabilities in the current
        quarter. The Corporation is in discussion with several parties
        regarding the refinancing of this debt. 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 were determined to have a
        value of $433,000.

    4.  Operating lines of credit:

        The Corporation has secured demand operating loans to finance working
        capital requirements. These arrangements can be summarized as
        follows:

        (a)   On January 21, 2008, the Corporation obtained a 364-day
        committed revolving banking facility which consists of an operating
        line of credit to a maximum of $15 million with an option to increase
        the maximum by an additional $10 million during the Corporation's
        peak operating season, from April 1 to November 30. The banking
        facility bears an interest rate of prime plus 0.50% and is secured by
        a general security agreement over the assets of Discovery Air Inc.,
        GSHL and its wholly owned subsidiaries, ATL and H&L. The security
        structure provides a first charge over accounts receivable and
        inventory for these entities, subject to the priority over certain
        H&L receivable outlined in 4 c), as well as a second floating charge
        over all other assets subject to specific permitted encumbrances. The
        banking facility replaces banking facilities inherited by the
        Corporation upon acquisition of these subsidiaries. As at April 30,
        2008, $6.4 million has been drawn under this banking facility.

        (b)   TAI has a banking facility which consists of an operating line
        of credit to a maximum of $2.75 million, bearing interest at prime
        plus 0.50%. This facility is secured by a general security agreement
        which provides a first charge over accounts receivable and inventory
        and a floating charge over all other assets subject to permitted
        encumbrances. As at April 30, 2008, $1.2 million has been drawn under
        this banking facility.

        (c)   H&L has an available revolving banking facility to a maximum of
        $1.5 million, bearing interest at prime plus 0.25%, whereby it
        pledges eligible accounts receivable at face value. The facility is
        secured by specific government receivables. As at April 30, 2008,
        there were no amounts outstanding under the revolving bank loan.

    5.  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, 2008, there were 134,522,805
        Class A common voting shares issued and outstanding and 681,384
        Class B common variable voting shares issued or outstanding.

        (b)   Warrants:

        At April 30, 2008, the Corporation had 1,178,568 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 $2.00 per share. The
        warrants expire in July 2008.

        (c)   Stock-based compensation:

        During the three-month period ended April 30, 2008, 381,350
        (2008 - 1,336,050) stock options with a weighted-average exercise
        price of $1.14 (2008 - $1.84) were granted. Salary expense of
        $404,000 (2008-$637,000) has been recognized in the quarter by the
        Corporation relating to the vested portion of the estimated fair
        value of the 7,494,550 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 3.13%, (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 $0.51 per share.

    6.  Change in other assets and liabilities

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
        (thousands of dollars)                          2008          2007
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        Accounts receivable                         $   (9,614)   $   (3,531)
        Inventory                                       (1,193)          423
        Prepaid expenses and other                      (3,929)         (336)
        Accounts payable and accrued liabilities         3,947         2,023
        Income taxes payable                              (531)         (995)
        ---------------------------------------------------------------------
                                                    $  (11,320)   $   (2,416)
        ---------------------------------------------------------------------

    7.  Related party transactions:

        At April 30, 2008, the Corporation had total indebtedness, including
        accrued interest, of $19.6 million (2008-$18.7 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
        quarter ended April 30, 2008, interest expense on this debt totaled
        $227,000 (2008-$287,000).

    8.  Income taxes:

                                                  for the three months ended
                                                  ---------------------------
                                                      April 30      April 30
        (thousands of dollars)                          2008          2007
        ---------------------------------------------------------------------

        Tax provision at basic rate of 32%
         (2007-34%)                                 $   (1,225)   $   (1,712)

        Changes resulting from:
          Permanent differences                             61           246

        ---------------------------------------------------------------------
        Income tax recovery                         $   (1,164)   $   (1,466)
        ---------------------------------------------------------------------

        Permanent differences relate primarily to adjustment for the non-
        deductible stock-based compensation expense.

    9.  Capital disclosures:

        The Corporation's objective in managing its capital is to maintain a
        strong capital base to ensure investor, creditor and market
        confidence and to sustain continued growth and value of our company.
        The Corporation seeks to achieve continued growth and value through
        acquisition and by growing its existing operations. Capital is
        managed in accordance with policies and financial plans that are
        approved and regularly reviewed by senior management and the Board of
        Directors and take into account forecasted capital needs, actual
        performance and market conditions. The overall objectives for
        managing capital remained unchanged in the first quarter of 2009 from
        the comparative period. In the management of capital, the Corporation
        considers its capital structure to consist of long-term debt and
        shareholders' equity.

        The Corporation monitors its capital adequacy on a number of bases,
        which includes monitoring the ratio of long-term debt to equity.

                                                      April 30    January 31
        (thousands of dollars)                          2008         2008
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        Long-term debt (including current portion)  $  142,788    $  134,069
        ---------------------------------------------------------------------
        Shareholders' Equity                        $  199,571    $  201,867

        ---------------------------------------------------------------------
        Long-term debt to equity                          0.72          0.66
        ---------------------------------------------------------------------


        The Corporation is bound by certain covenants in its general credit
        facilities. These covenants place restrictions on certain funded debt
        ratios, interest coverage ratios and a minimum level of tangible net
        worth. As well, there are restrictions on incurring additional debt
        and capital distributions without the lenders' prior approval. As at
        April 30, 2008, the Corporation met these requirements and does not
        expect its activities in fiscal 2009 to be constrained by them.

    10. Financial instruments - Disclosure and Presentation:

        The Corporation is exposed, in varying degrees, to a variety of
        financial instrument related risks.

        Financial instruments

        The Corporation's financial assets and liabilities are classified
        into the following categories:

        ---------------------------------------------------------------------
        Cash                                Assets held for trading
        Accounts receivable                 Loans and receivables
        Bank indebtedness                   Other financial liabilities
        Accounts payable and accrued        Other financial liabilities
         liabilities
        Long-term debt                      Other financial liabilities

        Carrying values for assets and liabilities classified as held for
        trading, loans and receivables and other financial liabilities
        (excluding long- term debt) approximate their carrying value as such
        instruments are carried at fair value due to their short-term nature.
        The fair value of long-term debt as at April 30, 2008 was $142.2
        million as compared to $142.8 million in carrying value.

        The fair value of the Corporation's fixed long-term debt, excluding
        the convertible debentures, was estimated based on discounted future
        cash flows using current rates for similar financial instruments
        subject to similar risks and maturities. The fair value of the
        convertible debentures was based on the closing trade price on the
        Toronto Stock Exchange, as at April 30, 2008. The fair value of the
        Corporation's variable rate long-term debt approximates its carrying
        value as it is at a floating market rate of interest.

        Risk management overview

        The Corporation is exposed to a number of different financial risks
        arising from natural business exposures as well as its use of
        financial instruments which include market, credit and liquidity
        risks. The Corporation's overall risk management process is designed
        to identify, manage and mitigate business risk which includes
        financial risk, among others. Management and the Board of Directors,
        both separately and together, discuss the principal business risks to
        which the Corporation is exposed. The Board of Directors sets
        policies for the implementation of systems to manage, monitor and
        mitigate identifiable risks. Risk management strategies, policies and
        limits are designed to ensure the risk exposures are managed within
        the Corporation's business objectives and risk tolerance. The
        Corporation's risk management objective is to optimize the balance
        between maximizing return for its shareholders and protecting and
        minimizing volatility in cash flow.

        The risks associated with the Corporation's financial instruments and
        the way in which such exposure is managed is provided as follows:

        Market risk

        Market risk is the risk of loss that results from changes in market
        factors such as foreign currency exchange rates and interest rates.
        The level of market risk to which the Corporation is exposed at any
        point in time varies depending on market conditions, market rate
        movements and the composition of the Corporation's financial assets
        and liabilities held, non-trading physical assets and contract
        portfolios. The Corporation's management is responsible for
        determining the acceptable level of risk and will utilize hedging
        instruments to the extent it believes it is prudent to manage
        existing or anticipated risks, commitments, or obligations based on
        its past experiences and expectations for the future.

        The Corporation's exposure to market risks is constantly changing in
        relation to the changes in the above mentioned market risk variables.
        As a result, the changes in fair value or cash flows based on the
        market variable fluctuations cannot be extrapolated as the
        relationship between the change in the market variable and the change
        in fair value or cash flow may not be linear.

          i)  Foreign exchange risk

              The Corporation is exposed to foreign currency exchange risk
              arising from fluctuations in exchange rates on its U.S. dollar
              and Euro denominated purchases of aircraft inventory parts,
              financing of aircraft, and periodic purchase of aircraft.

              As at April 30, 2008, the Corporation held net unhedged
              liabilities, of US $241,000 and EUR 498,000. As at April 30,
              2008, a 5% rise or fall in the Canadian dollar against the U.S.
              dollar and Euro, with all other variables unchanged, would have
              resulted in net increase or decrease of $52,000 to the
              Corporation's net loss for the three-month period ended April
              30, 2008.

              Aircraft are valued and traded in U.S. dollars. Under the terms
              and conditions of the Corporation's revolving long-term debt
              agreement to finance certain fleet assets, the borrowing base
              is recalculated in January of each year based on an appraisal
              of the aircraft that are included in the borrowing base. The
              borrowing base as at April 30, 2008, was $61.2 million based on
              the U.S./Canadian exchange rates in effect at the time of
              funding. The Corporation's borrowing base as at April 30, 2008
              exceeds the amount available and drawn under the loan agreement
              by $7.2 million. A 5% rise or fall in the Canadian dollar
              against the U.S. dollar, with all other variables unchanged,
              would result in an increase or decrease in the eligible
              borrowing base of $2.9 million.

              The Corporation's $12.9 million commitment to purchase aircraft
              and  related inventory (note 11) includes foreign currency
              amounts of US $4.8 million and EUR 3.3 million. All U.S. dollar
              commitments are scheduled to be purchased in the current fiscal
              year. Approximately EUR 1.3 million in commitments are to be
              purchased in the current fiscal year and EUR 2.0 million in
              commitments scheduled to be purchased in fiscal 2010.

          ii) Interest rate risk

              The Corporation's cash flow is exposed to interest rate
              fluctuations due to its variable interest rate long term
              instruments.

              As at April 30, 2008, a 0.25 b.p. increase or decrease in
              interest rates, with all other variables unchanged, would have
              resulted in an increase or decrease of $51,000 to the
              Corporation's net loss for the three-month period ended April
              30, 2008.

        Credit risk

        The Corporation is exposed to credit risk from a diverse range of
        customers, including mining, oil & gas, government and the general
        public, related to charters and tourism activities. The Corporation
        performs on-going credit evaluations of new and existing customers
        and provisions are set up for potential credit losses.

        As at April 30, 2008, 34% of the Corporation's total accounts
        receivable balance was derived by government entities. The
        Corporation considers the credit risk from government agencies to be
        extremely low. The remaining accounts receivable are distributed
        throughout a large base of customers with no high concentration with
        a particular customer. This mitigates the credit risk, combined with
        management's diligence to monitor the credit quality of the
        customers.

        Liquidity risk

        Liquidity risk is the risk that Corporation will not be able to
        satisfactorily meet its financial obligations as they fall due or to
        be in a position to refinance maturing obligations at a reasonable
        price or credit structure. The Corporation's management is
        responsible for ensuring that there is sufficient capital in order to
        meet the short-term business requirements, after taking into account
        cash flows from operations and the Corporation's cash position. The
        Corporation's liquidity is monitored regularly by management and the
        Board of Directors, factoring in the seasonal cycle of the
        Corporation's operations, by preparing short-term and long-term cash
        flow forecasts and also matching the maturity profiles of financial
        assets and liabilities to identify financing requirements well in
        advance of their maturity.

        The expected repayment of financial liabilities is as follows:

                                        Due        Due        Due        Due
                                     within    between    between    between
        (thousands of dollars)       1 year      1 & 2      2 & 3      3 & 4
                                                 years      years      years
        ---------------------------------------------------------------------

        Bank indebtedness         $   7,543  $       -  $       -  $       -
        Accounts payable
         and accrued liabilities     14,041          -          -          -
        Operating leases              6,386      3,648      2,445      1,223
        Long-term debt               39,869      5,316      3,375     27,236
        Commitments (note 11)         9,700      3,200          -          -
        ---------------------------------------------------------------------
                                  $  77,539  $  12,164  $   5,820  $  28,459
        ---------------------------------------------------------------------

                                                   Due        Due
                                               between      after
                                                 4 & 5          5
                                                 years      years      Total
                                  -------------------------------------------
                                             $       -  $       -  $   7,543

                                                     -          -     14,041
                                                 1,026        327     15,055
                                                52,574     14,418    142,788
                                                     -          -     12,900
                                  -------------------------------------------
                                             $  53,600  $  14,745  $ 192,327
                                  -------------------------------------------

    11. Commitments:

        The Corporation has annual lease obligations for aircraft and
        premises. Amounts due under these leases for each of the five
        succeeding years and thereafter is presented in note 10.

        The Corporation is committed to purchase aircraft, related inventory
        and service contracts for an estimated purchase price of $12.9
        million. Approximately $9.7 million of the committed purchases are
        scheduled to be made in the current fiscal year with the remaining
        $3.2 million in committed purchases to be made in fiscal 2010.

    12. Segmented information:

        The Corporation has two reportable business segments: Northern
        Services and Government Services. These segments are differentiated
        by the market in which the Corporation's aviation and related
        services operate in. The Northern Services segment is represented by
        GSHL, ATL and DMS and the Government Services segment is represented
        by TAI and H&L. The Northern Services segment's primary market is
        based on the activities in Northern Canada. While the segment has a
        wide customer base servicing companies in the business of mineral,
        base and precious metal exploration and production, wildlife
        services, forest fire suppression, oil and gas exploration, power
        line construction and maintenance, aerial surveys exploration and
        tourism. Entities in the Government Services segment provide niche
        services primarily aimed at government entities. All other activities
        that are not allocated to these two business segments are reported
        under Corporate Support.

        The operations were previously segmented between Rotary Wing, which
        included GSHL, and Fixed Wing, which included ATL, TAI, H&L and DMS.
        The Corporation has re-aligned the segment disclosure of its
        operations with the objective of providing better insight into the
        Corporation's performance, its prospects for future net cash flow and
        ultimately to allow the readers to make a more informed assessment of
        the Corporation's results. The revised segment disclosure is
        consistent with management's approach in evaluating the Corporation's
        subsidiaries. In updating the segment information, management
        assessed the economic characteristics of the Corporation's
        subsidiaries, considering the more relevant variables such as the
        type of customers that the operations service, and ultimately
        determined that the revised segment better represents the
        commonalities of the operations within their respective segment.

                                Northern   Government   Corporate
                                Services    Services     Support       Total
        ---------------------------------------------------------------------

        Revenue                $  20,541   $  10,206   $       7   $  30,754
        ---------------------------------------------------------------------
        Operating expenses        20,408       6,569       1,462      28,439
        Amortization               2,086       1,015          16       3,117
        Loss from operations
         before undernoted items  (1,953)      2,622      (1,471)       (802)
        Financing costs                                                3,025
        Income taxes                                                  (1,164)
        Minority interest                                                 37
        ---------------------------------------------------------------------
        Net loss                                                      (2,700)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Total assets           $ 288,479   $ 103,801   $   1,385   $ 393,665
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


                                Northern   Government   Corporate
                                Services    Services     Support       Total
        ---------------------------------------------------------------------

        Revenue                $  15,674   $     330   $      63   $  16,067
        ---------------------------------------------------------------------
        Operating expenses        14,480         919       1,473      16,872
        Amortization               2,214         114           -       2,328
        Loss from operations
         before undernoted
         items                    (1,020)       (703)     (1,410)     (3,133)
        Financing costs                                                1,919
        Income taxes                                                  (1,466)
        Minority interest                                                 (5)
        ---------------------------------------------------------------------
        Net loss                                                      (3,581)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Total assets           $ 268,306   $  14,697   $   3,695   $ 286,698
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    13. Subsequent event:

        On June 10, 2008, the Corporation filed a notice with the Toronto
        Stock Exchange ("Exchange") to make a normal course issuer bid
        ("NCIB") allowing the Corporation to purchase for cancellation up to
        5,000,000 of its Class A common voting shares ("common shares")
        representing 3.72% of the 134,461,555 issued and outstanding common
        shares as at June 11, 2008. Subject to one block purchase per
        calendar week allowed pursuant to the rules of the Exchange, the
        maximum number of common shares to be acquired under the NCIB each
        day is 11,670 common shares. The Corporation may buy back common
        shares from time to time during the next twelve months commencing
        June 12, 2008 and ending June 11, 2009, or such earlier date as the
        Corporation may complete its purchases pursuant to the Notice of
        Intention. Any purchase made under the NCIB will be effected through
        the facilities of the Exchange and in accordance with the policies
        and rules of the Exchange.
    




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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