Harry Winston Diamond Corporation Announces Second Quarter Fiscal 2009 Results



    TORONTO, Sept. 9 /CNW/ - Harry Winston Diamond Corporation (TSX: HW;
NYSE:   HWD) today reported second quarter results for the period ending
July 31, 2008. The Company recorded an increase in consolidated sales for the
quarter of 7%, generating a 23% increase in gross margin and a 30% increase in
consolidated earnings from operations compared to the results of the second
quarter of the prior year. Consolidated quarterly sales totalled
$186.1 million with earnings from operations of $73.4 million compared to
$173.3 million and $56.2 million, respectively, for the comparable quarter of
the prior year.
    Net earnings were $49.9 million, or $0.81 per share, compared to net
earnings of $20.1 million, or $0.34 per share, respectively, in the second
quarter of the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $11.8 million foreign exchange loss, or
$0.20 per share, as a result of the strengthening of the Canadian dollar
relative to the US dollar, compared to a net $5.3 million foreign exchange
gain in the current quarter, or $0.09 per share.
    "The international cachet of the Harry Winston brand has proven its
strength despite difficult trading conditions in both the US and Japanese
markets. This expanded market place has also delivered strong pricing for our
rough diamond sales in the face of lower than anticipated production from the
Diavik Mine as we work through the transition from one open pit to the next
and the uncertainty in production forecasting that this entails. The
construction program to develop the underground portions of the ore bodies
that add lifetime and operational security to the project is well advanced and
comfortably within schedule and cost budgets," said Robert A. Gannicott,
Chairman and Chief Executive Officer.
    Thomas J. O'Neill, President of Harry Winston Diamond Corporation added,
"Our businesses in Asia, Europe and the Middle East have been sufficient to
offset the general market softness in the US and Japan; this contributed to
our strong retail finish for second quarter. Together with solid results from
the first quarter, the first half of the year has put us on firm footing into
the second half of the year."
    Earnings from operations for the mining segment increased 27% to
$67.5 million compared to the comparable quarter of the prior year. Rough
diamond production for the second calendar quarter was down 23% to 1.0 million
carats produced versus 1.3 million for the comparable quarter of the prior
year resulting from the continuing grade variation in the A-154 South pipe and
the initial stripping of low grade A-418 ore mixed with waste overburden
material. Mining sales of $105.0 million remained at a consistent level with
the prior year as higher diamond prices compensated for reduced volume.
    The retail segment recorded a 19% increase in sales to $81.1 million with
earnings from operations of $5.9 million compared to earnings from operations
of $3.2 million in the comparable quarter of the prior year. Retail segment
SG&A as a percentage of sales decreased to 42% in the second quarter from 43%
in the comparable quarter of the prior year.

    
    Second Quarter Fiscal 2009 Financial Highlights
    (US$ in millions except Earnings per Share amounts)

    -------------------------------------------------------------------------
                                        Three     Three      Six       Six
                                        months    months    months    months
                                        ended     ended     ended     ended
                                       Jul. 31,  Jul. 31,  Jul. 31,  Jul. 30,
                                         2008      2007      2008      2007
    -------------------------------------------------------------------------
    Sales                                186.1     173.3     342.2     314.6
    -------------------------------------------------------------------------
    Earnings from operations              73.4      56.2     113.0      92.3
    -------------------------------------------------------------------------
    Net earnings                          49.9      20.1      71.2      23.3
    -------------------------------------------------------------------------
    Earnings per share                   $0.81     $0.34     $1.17     $0.40
    -------------------------------------------------------------------------
    

    Dividend Announcement

    Harry Winston Diamond Corporation is pleased to declare an eligible
quarterly dividend payment of US$0.05 per share. Shareholders of record at the
close of business on October 15, 2008, will be entitled to receive payment of
this dividend on October 29, 2008.

    Conference Call and Webcast

    As previously announced, Harry Winston Diamond Corporation will host a
conference call for analysts, investors and other interested parties on
Wednesday, September 10, beginning at 10:00AM EDT. Listeners may access a live
broadcast of the conference call on the company's investor relations web site
at http://investor.harrywinston.com or by dialing 866.713.8564 within North
America or 617.597.5312 from international locations and entering passcode
73778735.
    An online archive of the broadcast will be available by accessing the
company's investor relations web site at http://investor.harrywinston.com. A
telephone replay of the call will be available one hour after the call through
11:00PM (EDT), Wednesday, September 24, 2008, by dialing 888.286.8010 within
North America or 617.801.6888 from international locations and entering
passcode 16919976.

    Information in this news release that is not current or historical
factual information may constitute forward-looking information or statements
within the meaning of applicable securities laws. Implicit in this
information, particularly in respect of statements as to future operating
results and economic performance of Harry Winston Diamond Corporation and
statements about the Diavik Diamond Mine, are assumptions regarding world
economic conditions, projected revenue and expenses, diamond prices,
construction timelines and budgets, ore grades and the Canadian/US dollar
exchange rate. These assumptions, although considered reasonable by Harry
Winston Diamond Corporation at the time of preparation, may prove to be
incorrect. Forward-looking information is subject to certain factors,
including risks and uncertainties, which could cause actual results to differ
materially from what we currently expect. These factors include, among other
things, the uncertain nature of mining and mine development activities, risks
associated with underground construction activities, risks associated with
joint venture operations, risks associated with the remote location of the
Diavik Diamond Mine site, risks associated with regulatory and financing
requirements, fluctuations in diamond prices, changes in world economic
conditions, increased competition from other luxury goods retailers, changes
in consumer preferences and tastes in jewelry, and the risk of continued
fluctuations in the Canadian/US dollar exchange rate.

    About Harry Winston Diamond Corporation

    Harry Winston Diamond Corporation (TSX: HW; NYSE:   HWD) is a specialist
diamond enterprise with assets in the mining and retail segments of the
diamond industry. The company supplies rough diamonds to the global market
from its 40% interest in the Diavik Diamond Mine, located in Canada's
Northwest Territories. The company's retail division, Harry Winston, Inc., is
a premier jewelry and timepiece retailer with salons in key locations
including New York, Paris, London, Beijing, Tokyo and Beverly Hills. For more
information, please go to www.harrywinston.com or for investor information,
visit investor.harrywinston.com.

    
                                 Highlights
    (All figures are in United States dollars unless otherwise indicated)
    

    The Company recorded an increase in consolidated sales for the quarter of
7%, generating a 23% increase in gross margin and a 30% increase in
consolidated earnings from operations compared to the results of the second
quarter of the prior year. Consolidated quarterly sales totalled
$186.1 million with earnings from operations of $73.4 million compared to
$173.3 million and $56.2 million, respectively, for the comparable quarter of
the prior year.
    Net earnings were $49.9 million, or $0.81 per share, compared to net
earnings of $20.1 million, or $0.34 per share, respectively, in the second
quarter of the prior year. Net earnings for the comparable quarter of the
prior year were reduced by a net $11.8 million foreign exchange loss, or
$0.20 per share, as a result of the strengthening of the Canadian dollar
relative to the US dollar, compared to a net $5.3 million foreign exchange
gain in the current quarter, or $0.09 per share.
    Earnings from operations for the mining segment increased 27% to
$67.5 million compared to the comparable quarter of the prior year. Rough
diamond production for the second calendar quarter was down 23% to 1.0 million
carats produced versus 1.3 million for the comparable quarter of the prior
year resulting from the continuing grade variation in the A-154 South pipe and
the initial stripping of low grade A-418 ore mixed with waste overburden
material. Mining sales of $105.0 million remained at a consistent level with
the prior year as higher diamond prices compensated for reduced volume.
    The retail segment recorded a 19% increase in sales to $81.1 million,
with earnings from operations of $5.9 million compared to earnings from
operations of $3.2 million in the comparable quarter of the prior year. Retail
segment SG&A as a percentage of sales decreased to 42% in the second quarter
from 43% in the comparable quarter of the prior year.


    
                     Management's Discussion and Analysis
     Prepared as of September 9, 2008 (all figures are in United States
                     dollars unless otherwise indicated)
    

    The following is management's discussion and analysis ("MD&A") of the
results of operations for Harry Winston Diamond Corporation (the "Company")
for the three and six months ended July 31, 2008, and its financial position
as at July 31, 2008. This MD&A is based on the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles in Canada ("Canadian GAAP") and should be read in conjunction with
the unaudited consolidated financial statements and notes thereto for the
three and six months ended July 31, 2008 and the audited consolidated
financial statements of the Company and notes thereto for the year ended
January 31, 2008. Unless otherwise specified, all financial information is
presented in United States dollars. Unless otherwise indicated, all references
to "second quarter" refer to the three months ended July 31, 2008 and all
references to "international" for the retail segment refer to Europe and Asia.
    Certain comparative figures have been reclassified to conform with the
current year's presentation.

    Caution Regarding Forward-Looking Information

    Certain information included in this MD&A may constitute forward-looking
information within the meaning of Canadian and United States securities laws.
In some cases, forward-looking information can be identified by the use of
terms such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "intend", "estimate", "predict", "potential", "continue" or other
similar expressions concerning matters that are not historical facts.
Forward-looking information may relate to management's future outlook and
anticipated events or results, and may include statements or information
regarding plans, timelines and targets for construction, mining, development,
production and exploration activities at the Diavik Diamond Mine, future
mining and processing at the Diavik Diamond Mine, projected capital
expenditure requirements and the funding thereof, new salon openings,
liquidity and working capital requirements and sources, estimated reserves and
resources at, and production from, the Diavik Diamond Mine, the number and
timing of expected rough diamond sales, expected diamond prices and
expectations concerning the diamond industry, expected cost of sales and gross
margin trends in the mining segment, and expected sales trends in the retail
segment. Actual results may vary. See "Risks and Uncertainties" on page 18.
    Forward-looking information is based on certain factors and assumptions
regarding, among other things, mining, production, construction and
exploration activities at the Diavik Diamond Mine, credit market conditions
and the ability of the Company to refinance its existing credit facilities,
the level of worldwide diamond production and world and US economic
conditions. Specifically, in estimating Harry Winston Diamond Corporation's
projected share of the Diavik Diamond Mine capital expenditure requirements
over the next two years, Harry Winston Diamond Corporation has used an average
Canadian/US dollar exchange rate of $0.99, and has assumed that construction
will continue on schedule and without undue disruption with respect to current
underground mining construction initiatives. In making statements regarding
estimated production at the Diavik Diamond Mine and future mining activity and
mine plans, including plans, timelines and targets for construction, mining,
development, production and exploration activities at the Diavik Diamond Mine,
and future rough diamond sales, Harry Winston Diamond Corporation has assumed,
among other things, that mining operations and construction and exploration
activities will proceed in the ordinary course according to schedule and
consistent with past results. In making statements regarding expected diamond
prices and expectations concerning the diamond industry and expected sales
trends in the retail segment, the Company has made assumptions regarding,
among other things, world and US economic conditions. While Harry Winston
Diamond Corporation considers these assumptions to be reasonable based on the
information currently available to it, they may prove to be incorrect. See
"Risks and Uncertainties" on page 18.
    Forward-looking information is subject to certain factors, including
risks and uncertainties, which could cause actual results to differ materially
from what we currently expect. These factors include, among other things, the
uncertain nature of mining activities, including risks associated with
underground construction and mining operations, risks associated with joint
venture operations, risks associated with the remote location of and harsh
climate at the Diavik Diamond Mine site, risks associated with regulatory
requirements, fluctuations in diamond prices and changes in US and world
economic conditions, the risk of fluctuations in the Canadian/US dollar
exchange rate, financing and credit market risk, risks relating to the
Company's salon expansion strategy and the risks of competition in the luxury
jewelry segment. Please see page 18 of this Interim Report, as well as the
Company's Annual Report, available at www.sedar.com, for a discussion of these
and other risks and uncertainties involved in Harry Winston Diamond
Corporation's operations.
    Readers are cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this Management's Discussion
and Analysis, and should not rely upon this information as of any other date.
Due to assumptions, risks and uncertainties, including the assumptions, risks
and uncertainties identified above and elsewhere in this Management's
Discussion and Analysis, actual events may differ materially from current
expectations. While Harry Winston Diamond Corporation may elect to, it is
under no obligation and does not undertake to update or revise any
forward-looking information, whether as a result of new information, future
events or otherwise at any particular time, except as required by law.
Additional information concerning factors that may cause actual results to
materially differ from those in such forward-looking statements is contained
in the Harry Winston Diamond Corporation's filings with Canadian and United
States securities regulatory authorities and can be found at www.sedar.com and
www.sec.gov, respectively.

    Summary Discussion

    Harry Winston Diamond Corporation is a specialist diamond company
focusing on the mining and retail segments of the diamond industry. The
Company supplies rough diamonds to the global market from production received
from its 40% ownership interest in the Diavik Diamond Mine, located off Lac de
Gras in Canada's Northwest Territories. The Company also owns a 100% interest
in Harry Winston Inc., the premier fine jewelry and watch retailer. Harry
Winston Diamond Corporation's mission is to deliver shareholder value through
the enhanced earning power and longevity of the Diavik Diamond Mine asset as
the cornerstone of a profitable synergy with the Harry Winston(R) brand. In a
changing diamond market-place, Harry Winston Diamond Corporation has charted a
unique course to continue to build shareholder value.
    The Company's most significant asset is a 40% interest in the Diavik
group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI")
(60%) and Harry Winston Diamond Mines Ltd. (40%) where Harry Winston Diamond
Corporation owns an undivided 40% interest in the assets, liabilities and
expenses. DDMI is the operator of the Diavik Diamond Mine. Both companies are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio
Tinto plc of London, England, and Harry Winston Diamond Mines Ltd. is a wholly
owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.

    Market Commentary

    The Diamond Market

    The rough diamond market has enjoyed strong price growth during the last
six months as purchases from the emerging market economies have more than
compensated for the US and Japanese softness in the higher quality stones that
are the key component of Harry Winston's rough diamond sales. Lower quality
diamonds have seen price declines in some categories despite the price
increases in better quality diamonds.
    Looking forward, the strengthening US dollar is beginning to drive local
currency price increases internationally and a period of gains can be expected
in the short term. In the longer term, a continuing shrinkage of mine supply
coupled with expanded demand from the BRIC (Brazil, Russia, India, China)
economies is expected to underpin further price increases, especially as the
US and Japan, historically the world's two largest diamond consumers, return
to economic health.

    The Retail Jewelry Market

    The global luxury diamond jewelry market remains strong, especially in
markets outside of the US and Japan. The US and Japanese markets have been
negatively impacted, primarily in the lower and mid-range of the retail
market, by the challenging macroeconomic environment. Emerging markets in the
Asia Pacific region, Russia and the Middle East continue to provide robust
demand for luxury products.

    (R) Harry Winston is a registered trademark of Harry Winston Inc.
Consolidated Financial Results


    Consolidated Financial Results

    The following is a summary of the Company's consolidated quarterly
results for the eight quarters ended July 31, 2008 following the basis of
presentation utilized in the Company's Canadian GAAP financial statements:

    
    (expressed in thousands of United States dollars except per share amounts
    and where otherwise noted)
    (quarterly results are unaudited)

    -------------------------------------------------------------------------
                                2009      2009      2008      2008      2008
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $186,119  $156,079  $188,195  $176,478  $173,269
    Cost of sales             73,542    73,149    83,637    74,591    81,827
    -------------------------------------------------------------------------
    Gross margin             112,577    82,930   104,558   101,887    91,442
    Gross margin (%)           60.5%     53.1%     55.6%     57.7%     52.8%
    Selling, general and
     administrative
     expenses                 39,194    43,285    45,494    35,539    35,201
    -------------------------------------------------------------------------
    Earnings from
     operations               73,383    39,645    59,064    66,348    56,241
    -------------------------------------------------------------------------
    Interest and
     financing expenses       (5,366)   (5,453)   (7,082)   (7,422)   (7,222)
    Other income (expense)       815       246       706       594       545
    Insurance settlement           -         -    13,488         -         -
    Foreign exchange
     gain (loss)               5,301       155    22,270   (40,584)  (11,785)
    -------------------------------------------------------------------------
    Earnings before
     income taxes             74,133    34,593    88,446    18,936    37,779
    Income taxes (recovery)   24,185    13,336    (1,968)   26,197    17,747
    -------------------------------------------------------------------------
    Earnings (loss) before
     minority interest        49,948    21,257    90,414    (7,261)   20,032
    Minority interest              1         1       (34)       90       (26)
    -------------------------------------------------------------------------
    Net earnings (loss)     $ 49,947  $ 21,256  $ 90,448  $ (7,351) $ 20,058
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss)
     per share              $   0.81  $   0.35  $   1.55  $  (0.13) $   0.34
    Diluted earnings (loss)
     per share              $   0.81  $   0.35  $   1.54  $  (0.13) $   0.33
    Cash dividends declared
     per share              $   0.05  $   0.05  $   0.05  $   0.25  $   0.25
    Total assets(i)         $  1,637  $  1,591  $  1,494  $  1,433  $  1,367
    Total long-term
     liabilities(i)         $    617  $    634  $    660  $    530  $    486
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                              Six       Six
                                                            Months    Months
                                                             Ended     Ended
                                2008      2007      2007   July 31,  July 31,
                                  Q1        Q4        Q3      2008      2007
    -------------------------------------------------------------------------
    Sales                   $141,365  $154,328  $145,232  $342,198  $314,634
    Cost of sales             71,132    78,559    74,636   146,691   152,959
    -------------------------------------------------------------------------
    Gross margin              70,233    75,769    70,596   195,507   161,675
    Gross margin (%)           49.7%     49.1%     48.6%     57.1%     51.4%
    Selling, general and
     administrative
     expenses                 34,211    38,590    33,480    82,479    69,412
    -------------------------------------------------------------------------
    Earnings from
     operations               36,022    37,179    37,116   113,028    92,263
    -------------------------------------------------------------------------
    Interest and
     financing expenses       (6,132)   (6,441)   (5,570)  (10,819)  (13,354)
    Other income (expense)       913      (111)    1,764     1,061     1,458
    Insurance settlement           -         -         -         -         -
    Foreign exchange
     gain (loss)             (13,292)    9,831    (1,560)    5,456   (25,077)
    -------------------------------------------------------------------------
    Earnings before
     income taxes             17,511    40,458    31,750   108,726    55,290
    Income taxes (recovery)   14,118    13,169    13,005    37,521    31,865
    -------------------------------------------------------------------------
    Earnings (loss) before
     minority interest         3,393    27,289    18,745    71,205    23,425
    Minority interest            140        (5)      (86)        2       114
    -------------------------------------------------------------------------
    Net earnings (loss)     $  3,253  $ 27,294  $ 18,831  $ 71,203  $ 23,311
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss)
     per share              $   0.06  $   0.47  $   0.32  $   1.17  $   0.40
    Diluted earnings (loss)
     per share              $   0.05  $   0.46  $   0.32  $   1.17  $   0.39
    Cash dividends declared
     per share              $   0.25  $   0.25  $   0.25  $   0.10  $   0.50
    Total assets(i)         $  1,315  $  1,288  $  1,246  $  1,637  $  1,367
    Total long-term
     liabilities(i)         $    408  $    536  $    530  $    617  $    486
    -------------------------------------------------------------------------

    (i) Total assets and total long-term liabilities are expressed in
        millions of United States dollars.

        The comparability of quarter-over-quarter results is impacted by
        seasonality for both the mining and retail segments. Harry Winston
        Diamond Corporation expects that the quarterly results for its mining
        segment will continue to fluctuate depending on the seasonality of
        production at the Diavik Diamond Mine, the number of rough diamond
        sales events conducted during the quarter, and the volume, size and
        quality distribution of rough diamonds delivered from the Diavik
        Diamond Mine in each quarter. The quarterly results for the retail
        segment are also seasonal, with generally higher sales during the
        fourth quarter due to the holiday season. See "Segmented Analysis" on
        page 8 for additional information.


    Three Months Ended July 31, 2008 Compared to Three Months Ended
    July 31, 2007

    Consolidated Net Earnings
    

    The second quarter net earnings of $49.9 million or $0.81 per share
represent an increase of $29.9 million or $0.47 per share as compared to the
results of the second quarter of the prior year. The increase is primarily due
to improved operating performance in the mining and retail segments and a net
foreign exchange gain of $5.3 million, or $0.09 per share, in the current
quarter compared to an $11.8 million net foreign exchange loss, or $0.20 per
share, recognized in the comparable quarter of the prior year related
principally to an unrealized non-cash loss on future income taxes payable. For
more detail on the impact of the foreign exchange gain on future income taxes
payable, see "Consolidated Income Taxes" below.

    Consolidated Sales

    Sales for the second quarter totalled $186.1 million, consisting of rough
diamond sales of $105.0 million and retail segment sales of $81.1 million.
This compares to sales of $173.3 million in the comparable quarter of the
prior year (rough diamond sales of $105.1 million and retail segment sales of
$68.2 million). The Company held two primary rough diamond sales in the second
quarter compared to three in the comparable quarter of the prior year. Ongoing
quarterly variations in revenues are inherent in the Company's business,
resulting from the seasonality of the mining and retail activities as well as
from the variability of the rough diamond sales schedule.

    Consolidated Cost of Sales and Gross Margin

    The Company's second quarter cost of sales was $73.5 million for a gross
margin of 60.5% compared to $81.8 million cost of sales and a gross margin of
52.8% for the comparable quarter of the prior year. Included in the second
quarter is a $4.3 million insurance settlement relating to an excavator fire
that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine.
The settlement represents the recovery of the cost of the excavator that was
previously written off along with incremental operating expenses relating to
the procurement of a replacement excavator. The Company's cost of sales
includes costs associated with mining, rough diamond sorting and retail sales
activities. See "Segmented Analysis" on page 8 for additional information.

    Consolidated Selling, General and Administrative Expenses

    The principal components of selling, general and administrative ("SG&A")
expenses include expenses for salaries and benefits, advertising, professional
fees, rent and building related costs. The Company incurred SG&A expenses of
$39.2 million for the second quarter, compared to $35.2 million in the
comparable quarter of the prior year.
    Included in SG&A expenses for the second quarter are $5.2 million for the
mining segment as compared to $5.9 million for the comparable quarter of the
prior year, and $34.0 million for the retail segment as compared to
$29.3 million for the comparable quarter of the prior year. For the mining
segment, the decrease in SG&A expenses was primarily due to a mark-to-market
reduction in stock-based compensation. For the retail segment, the increase in
SG&A expenses was as a result of our continued investment in the Harry Winston
brand, and reflected an increase in salaries and benefits, rent and building
related expenses and depreciation and amortization expense. See "Segmented
Analysis" on page 8 for additional information.

    Consolidated Income Taxes

    The Company recorded a tax expense of $24.2 million during the second
quarter, compared to a tax expense of $17.7 million in the comparable quarter
of the prior year. The Company's effective income tax rate for the quarter,
excluding Harry Winston's retail segment, is 33%, which is based on a
statutory income tax rate of 31% adjusted for various items including
Northwest Territories mining royalty, impact of foreign exchange, and earnings
subject to tax different than the statutory rate.
    The Company's functional and reporting currency is US dollars; however,
the calculation of income tax expense is based on income in the currency of
the country of origin. As such, the Company is continually subject to foreign
exchange fluctuations, particularly as the Canadian dollar moves against the
US dollar. The weakening of the Canadian dollar during the second quarter
resulted in an unrealized foreign exchange gain of $4.4 million on the
revaluation of the Canadian denominated future income tax liability, compared
to an unrealized foreign exchange loss of $9.6 million recorded in the
comparable quarter of the prior year. This unrealized foreign exchange gain is
not taxable for Canadian income tax purposes.
    The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
    The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:

    
                                                             Three     Three
                                                            Months    Months
                                                             Ended     Ended
                                                           July 31,  July 31,
                                                              2008      2007
    -------------------------------------------------------------------------
    Statutory income tax rate                                  31%       34%
    Stock compensation                                          -%      (1)%
    Northwest Territories mining royalty
     (net of income tax relief)                                 8%       12%
    Impact of change in future income tax rate                  -%      (2)%
    Impact of foreign exchange                                (4)%        6%
    Earnings subject to tax different than statutory rate     (3)%      (2)%
    Changes in valuation allowance                              1%        -%
    Benefits of losses recognized through reduction
     of goodwill                                                -%        2%
    Other items                                                 -%      (2)%
    Effective income tax rate                                  33%       47%
    -------------------------------------------------------------------------
    

    Consolidated Interest and Financing Expenses

    Interest and financing expenses of $5.4 million were incurred during the
second quarter compared to $7.2 million during the comparable quarter of the
prior year. The reduction in interest and financing expenses relates primarily
to the reduction in debt levels in the mining segment.

    Consolidated Other Income

    Other income of $0.8 million was recorded during the quarter compared to
other income of $0.5 million in the comparable quarter of the prior year.

    Consolidated Foreign Exchange Gain

    A net foreign exchange gain of $5.3 million was recognized during the
quarter compared to a net foreign exchange loss of $11.8 million in the
comparable quarter of the prior year. The gain in the current quarter relates
principally to the revaluation of the Company's Canadian dollar denominated
long-term future income tax liability as a result of the weakening of the
Canadian dollar against the US dollar at quarter end. The Company's ongoing
currency exposure relates primarily to expenses and obligations incurred in
Canadian dollars, as well as the revaluation of certain Canadian monetary
balance sheet amounts. The Company does not currently have any significant
derivative instruments outstanding.

    Six Months Ended July 31, 2008 Compared to Six Months Ended July 31, 2007

    Consolidated Net Earnings

    Net earnings for the six months ended July 31, 2008 of $71.2 million or
$1.17 per share compares to $23.3 million or $0.40 per share for the
six months ended July 31, 2007. The increase is due primarily to a net foreign
exchange gain of $5.5 million, or $0.09 per share, for the six months ended
July 31, 2008 compared to a $25.1 million net foreign exchange loss, or
$0.43 per share, recognized in the comparable period of the prior year related
principally to an unrealized non-cash loss on future income taxes payable.

    Consolidated Sales

    Sales for the six months ended July 31, 2008 were $342.2 million,
representing an increase of 9% over sales of $314.6 million for the six months
ended July 31, 2007. Rough diamond sales accounted for $186.4 million of total
sales compared to $187.8 million for the comparable period of the prior year.
Retail segment sales of $155.8 million accounted for the balance, compared to
$126.8 million for the comparable period of the prior year.

    Consolidated Cost of Sales and Gross Margin

    The Company's cost of sales for the six months ended July 31, 2008 was
$146.7 million for a gross margin of 57.1% compared to $153.0 million cost of
sales and a gross margin of 51.4% for the comparable period of the prior year.
Included in the six months ended July 31, 2008 is a $4.3 million insurance
settlement relating to an excavator fire that occurred in the fourth quarter
of fiscal 2006 at the Diavik Diamond Mine. The settlement represents the
recovery of the cost of the excavator that was previously written off along
with incremental operating expenses relating to the procurement of a
replacement excavator. The Company's cost of sales includes costs associated
with mining, rough diamond sorting and retail sales activities. See "Segmented
Analysis" on page 8 for additional information.

    Consolidated Selling, General and Administrative Expenses

    The Company incurred SG&A expenses of $82.5 million for the six months
ended July 31, 2008, compared to $69.4 million for the six months ended
July 31, 2007.
    Included in SG&A expenses for the six months ended July 31, 2008 are
$12.4 million for the mining segment as compared to $10.9 million for the
comparable period of the prior year, and $70.1 million for the retail segment
as compared to $58.5 million for the comparable period of the prior year. For
the mining segment, the increase of $1.4 million was primarily due to higher
salaries and benefits. For the retail segment, the increase was as a result of
our continued investment in the Harry Winston brand, and reflected an increase
in salaries and benefits, rent and building related expenses and depreciation
and amortization expense. Retail segment SG&A expenses also included
approximately $2.0 million of non-recurring expenses related to restructuring
and improvements carried out at the Geneva watch factory. See "Segmented
Analysis" on page 8 for additional information.

    Consolidated Income Taxes

    The Company recorded a tax expense of $37.5 million during the six months
ended July 31, 2008, compared to a tax expense of $31.9 million in the
comparable period of the prior year. The Company's effective income tax rate
for the quarter, excluding Harry Winston's retail segment, is 35%, which is
based on a statutory income tax rate of 31% adjusted for various items
including Northwest Territories mining royalty, impact of foreign exchange,
and earnings subject to tax different than the statutory rate.
    During the six months ended July 31, 2008, the Company recorded an
unrealized foreign exchange gain of $5.3 million on the revaluation of the
Canadian denominated future income tax liability, as compared to an unrealized
foreign exchange loss of $23.3 million recorded in the comparable period of
the prior year. This unrealized foreign exchange gain is not taxable for
Canadian income tax purposes.
    The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
    The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:

    
                                                               Six       Six
                                                            Months    Months
                                                             Ended     Ended
                                                           July 31,  July 31,
                                                              2008      2007
    -------------------------------------------------------------------------
    Statutory income tax rate                                  31%       34%
    Northwest Territories mining royalty
     (net of income tax relief)                                10%       13%
    Impact of change in future income tax rate                  -%      (2)%
    Impact of foreign exchange                                (4)%       12%
    Earnings subject to tax different than statutory rate     (4)%      (3)%
    Changes in valuation allowance                              1%        -%
    Benefits of losses recognized through reduction
     of goodwill                                                -%        3%
    Assessments and adjustments                                 1%        -%
    Other items                                                 -%        1%
    Effective income tax rate                                  35%       58%
    -------------------------------------------------------------------------
    

    Consolidated Interest and Financing Expenses

    Interest and financing expenses of $10.8 million were incurred during the
 six months ended July 31, 2008 compared to $13.4 million for the comparable
period of the prior year. The reduction in interest and financing expenses
relates primarily to the reduction in debt levels in the mining segment.

    Consolidated Other Income

    Other income, which includes interest income on the Company's various
bank balances, was $1.1 million during the six months ended July 31, 2008
compared to $1.5 million for the comparable period of the prior year.

    Consolidated Foreign Exchange Gain

    A net foreign exchange gain of $5.5 million was recognized during the
six months ended July 31, 2008 compared to a net foreign exchange loss of
$25.1 million recorded during the six months ended July 31, 2007. The current
year-to-date gain relates principally to the revaluation of the Company's
Canadian dollar denominated long-term future income tax liability as a result
of the weakening of the Canadian dollar against the US dollar at July 31,
2008. The Company's ongoing currency exposure relates primarily to expenses
and obligations incurred in Canadian dollars, as well as the revaluation of
certain Canadian monetary balance sheet amounts. The Company does not
currently have any significant derivative instruments outstanding.

    Segmented Analysis

    The operating segments of the Company include mining and retail segments.

    Mining

    The mining segment includes the production and sale of rough diamonds.

    
    (expressed in thousands of United States dollars) (quarterly results are
    unaudited)
    -------------------------------------------------------------------------
                                2009      2009      2008      2008      2008
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $105,014  $ 81,393  $103,238  $122,711  $105,071
    Cost of sales             32,390    32,150    36,962    45,985    46,217
    -------------------------------------------------------------------------
    Gross margin              72,624    49,243    66,276    76,726    58,854
    Gross margin (%)           69.2%     60.5%     64.2%     62.5%     56.0%
    Selling, general and
     administrative
     expenses                  5,151     7,208     5,663     6,748     5,861
    -------------------------------------------------------------------------
    Earnings from
     operations             $ 67,473  $ 42,035  $ 60,613  $ 69,978  $ 52,993
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                               Six       Six
                                                            Months    Months
                                                             Ended     Ended
                                 2008      2007      2007  July 31,  July 31,
                                  Q1        Q4        Q3      2008      2007
    -------------------------------------------------------------------------
    Sales                   $ 82,752  $ 81,035  $ 90,754  $186,407  $187,823
    Cost of sales             40,516    39,413    45,461    64,540    86,733
    -------------------------------------------------------------------------
    Gross margin              42,236    41,622    45,293   121,867   101,090
    Gross margin (%)           51.0%     51.4%     49.9%     65.4%     53.8%
    Selling, general and
     administrative
     expenses                  5,087     7,397     4,665    12,359    10,948
    -------------------------------------------------------------------------
    Earnings from
     operations             $ 37,149  $ 34,225  $ 40,628  $109,508  $ 90,142
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Three Months Ended July 31, 2008 Compared to Three Months Ended
    July 31, 2007

    Mining Sales
    

    Rough diamond sales for the second quarter totalled $105.0 million
compared to $105.1 million in the comparable quarter of the prior year
resulting from lower carat production offset by higher pricing. Rough diamond
production decreased 23% in the second calendar quarter from the prior year as
a result of the continuing grade variation in the A-154 South kimberlite pipe
combined with the initial stripping of low grade A-418 ore mixed with waste
overburden material.
    The Company held two primary rough diamond sales in the second quarter
compared to three in the comparable quarter of the prior year. The Company
expects that results for its mining segment will continue to fluctuate
depending on the seasonality of production at the Diavik Diamond Mine, the
number of primary and secondary sales events conducted at each sales location
during the quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Diamond Mine in each quarter.

    Mining Cost of Sales and Gross Margin

    The Company's second quarter cost of sales was $32.4 million for a gross
margin of 69.2% compared to a $46.2 million cost of sales and a gross margin
of 56.0% in the comparable quarter of the prior year. The reduction in cost of
sales resulted in part from a greater proportion of cost attributable to
development activity versus production activity. Also included in the second
quarter is a $4.3 million insurance settlement relating to an excavator fire
that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine.
The settlement represents the recovery of the cost of the excavator that was
previously written off along with incremental operating expenses relating to
the procurement of a replacement excavator. Total proceeds of $5.0 million
from the insurance settlement are expected to be received in the third
quarter, resulting in a gain of approximately $0.7 million. The mining gross
margin is anticipated to fluctuate between quarters, resulting from variations
in the specific mix of product sold during each quarter and the nature of the
mining activities.
    A substantial portion of cost of sales is mine operating costs, which are
incurred at the Diavik Diamond Mine. Cost of sales also includes rough diamond
sorting costs, which consist of the Company's cost of handling and sorting
product in preparation for sales to third parties, and amortization and
depreciation, the majority of which is recorded using the unit-of-production
method over estimated proven and probable reserves.

    Mining Selling, General and Administrative Expenses

    SG&A expenses for the mining segment decreased by $0.7 million from the
comparable period of the prior year primarily due to a mark-to-market
reduction to stock-based compensation.

    Six Months Ended July 31, 2008 Compared to Six Months Ended July 31, 2007

    Mining Sales

    Rough diamond sales for the six months ended July 31, 2008 totalled
$186.4 million compared to $187.8 million in the comparable period of the
prior year resulting from a combination of lower carat production offset by
higher pricing. Rough diamond production decreased 27% during the first half
of the calendar year from the prior year as the result of the continuing grade
variation in the A-154 South kimberlite pipe combined with the initial
stripping of low grade A-418 ore mixed with waste overburden material.
    The Company held four primary rough diamond sales, one of which was an
open-market tender, during the six months ended July 31, 2008, compared to
five in the comparable period of the prior year. Harry Winston Diamond
Corporation expects that results for its mining segment will continue to
fluctuate depending on the seasonality of production at the Diavik Mine, the
number of primary and secondary sales events conducted at each sales location
during the quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Mine in each quarter.

    Mining Cost of Sales and Gross Margin

    For the six months ended July 31, 2008, cost of sales was $64.5 million
for a gross margin of 65.4% compared to $86.7 million cost of sales and a
gross margin of 53.8% in the comparable quarter of the prior year. The
reduction in cost of sales resulted primarily from a greater proportion of
cost attributable to development activity versus production activity. Also
included in the six months ended July 31, 2008, is a $4.3 million insurance
settlement relating to an excavator fire that occurred in the fourth quarter
of fiscal 2006 at the Diavik Diamond Mine. The settlement represents the
recovery of the cost of the excavator that was previously written off along
with incremental operating expenses relating to the procurement of a
replacement excavator. Total proceeds of $5.0 million from the insurance
settlement are expected to be received in the third quarter, resulting in a
gain of approximately $0.7 million. The mining gross margin is anticipated to
fluctuate between quarters, resulting from variations in the specific mix of
product sold during each quarter and the nature of the mining activities.
    A substantial portion of cost of sales is mine operating costs, which are
incurred at the Diavik Diamond Mine. Cost of sales also includes rough diamond
sorting costs, which consist of the Company's cost of handling and sorting
product in preparation for sales to third parties, and amortization and
depreciation, the majority of which is recorded using the unit-of-production
method over estimated proven and probable reserves.

    Mining Selling, General and Administrative Expenses

    SG&A expenses for the mining segment increased by $1.4 million from the
comparable period of the prior year primarily due to an increase in salaries
and benefits.

    Retail

    The retail segment includes sales from Harry Winston's salons, which are
located in prime markets around the world including seven salons in the United
States: New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas and
Chicago; five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and
Nagoya; three salons in Europe: Paris, London and Geneva; and three salons in
Asia outside of Japan: Beijing, Taipei and Hong Kong.

    
    (expressed in thousands of United States dollars) (quarterly results are
    unaudited)

    -------------------------------------------------------------------------
                                2009      2009      2008      2008      2008
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $ 81,105  $ 74,686  $ 84,957  $ 53,767  $ 68,198
    Cost of sales             41,152    40,999    46,675    28,606    35,610
    -------------------------------------------------------------------------
    Gross margin              39,953    33,687    38,282    25,161    32,588
    Gross margin (%)           49.3%     45.1%     45.1%     46.8%     47.8%
    Selling, general and
     administrative
     expenses                 34,043    36,077    39,831    28,791    29,340
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations             $  5,910  $ (2,390) $ (1,549) $ (3,630) $  3,248
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                               Six       Six
                                                            Months    Months
                                                             Ended     Ended
                                2008      2007      2007   July 31,  July 31,
                                  Q1        Q4        Q3      2008      2007
    -------------------------------------------------------------------------
    Sales                   $ 58,613  $ 73,293  $ 54,478  $155,791  $126,811
    Cost of sales             30,616    39,146    29,175    82,151    66,226
    -------------------------------------------------------------------------
    Gross margin              27,997    34,147    25,303    73,640    60,585
    Gross margin (%)           47.8%     46.6%     46.4%     47.3%     47.8%
    Selling, general and
     administrative
     expenses                 29,124    31,193    28,815    70,120    58,464
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations             $ (1,127) $  2,954  $ (3,512) $  3,520  $  2,121
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Three Months Ended July 31, 2008 Compared to Three Months Ended
    July 31, 2007
    

    Retail Sales

    Sales for the second quarter were $81.1 million compared to $68.2 million
for the comparable quarter of the prior year, an increase of 19%. Strong
overall sales growth in the US and international markets outside of Japan
offset slower sales in the Japan market. Sales in the European market
increased 49% to $31.6 million, US sales increased 31% to $29.0 million, and
Asian sales decreased 17% to $20.5 million.

    Retail Cost of Sales and Gross Margin

    Cost of sales for Harry Winston Inc. for the second quarter was
$41.2 million compared to $35.6 million for the comparable quarter of the
prior year. Gross margin for the quarter was $40.0 million or 49.3% compared
to $32.6 million or 47.8% for the second quarter of the prior year. Excluding
the impact of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the second quarter and the comparable quarter of the prior year
would have been 51.3% and 51.1%, respectively.

    Retail Selling, General and Administrative Expenses

    With the expansion of the new international salon network, consistent
with the Company's retail growth strategy, SG&A expenses increased to
$34.0 million from $29.3 million in the comparable quarter of the prior year.
The increase, which was primarily due to the continued expansion of the retail
salon network, included an increase of $1.0 million in each of rent and
building related expenses, salaries and benefits, and depreciation and
amortization, an increase of $0.6 million in advertising and selling expenses,
an increase of $0.6 million in professional fees and $0.5 million in other
expenses. SG&A expenses include depreciation and amortization expense of
$3.1 million compared to $2.1 million in the comparable quarter of the prior
year. SG&A as a percentage of sales decreased to 42.0% in the second quarter
from 43.0% in the comparable quarter of the prior year.

    Six Months Ended July 31, 2008 Compared to Six Months Ended July 31, 2007

    Retail Sales

    Sales for the six months ended July 31, 2008 were $155.8 million compared
to $126.8 million for the comparable period of the prior year, an increase of
23%. Strong overall sales growth in the US and international markets outside
of Japan offset slower sales in the Japanese market. Sales in the European
market increased 45% to $63.3 million, US sales increased 16% to
$53.9 million, and Asian sales increased 5% to $38.6 million.

    Retail Cost of Sales and Gross Margin

    Cost of sales for the six months ended July 31, 2008 was $82.2 million
compared to $66.2 million for the six months ended July 31, 2007. Gross margin
for the six months ended July 31, 2008 was $73.6 million or 47.3% compared to
$60.6 million or 47.8% for the comparable period of the prior year. Excluding
the impact of sales of Harry Winston Inc. pre-acquisition inventory, gross
margin for the six months ended July 31, 2008 and the comparable period of the
prior year would have been 49.4% and 51.3%, respectively. Gross margin for the
six months ended July 31, 2008 was impacted by three factors related to the
first quarter: an increased contribution of high dollar value transactions,
which carry lower-than-average gross margins; an increase in costs related to
precious metals and gem stones; and an increase in research and development
costs to support the growing watch business.

    Retail Selling, General and Administrative Expenses

    SG&A expenses increased to $70.1 million for the six months ended
July 31, 2008 as compared to $58.6 million in the comparable period of the
prior year. However, SG&A as a percentage of sales decreased to 45.0% for the
six months ended July 31, 2008 compared to 46.1% in the comparable period of
the prior year. The increase, which was primarily due to the continued
expansion of the retail salon network, included an increase of $3.3 million in
rent and building related expenses, an increase of $2.6 million in salaries
and benefits, and an increase of $2.3 million in depreciation and
amortization. These increases were partially offset by a $0.5 million decrease
in advertising and selling expenses. Additionally, SG&A expenses included
approximately $2.0 million of non-recurring expenses related to restructuring
and improvements carried out at the Geneva watch factory. SG&A expenses
include depreciation and amortization expense of $6.3 million compared to
$4.0 million in the comparable period of the prior year.

    Operational Update

    Harry Winston Diamond Corporation's results of operations include results
from its mining and retail operations.

    Mining Segment

    During the second calendar quarter of 2008, the Diavik Diamond Mine
produced 2.5 million carats from 0.72 million tonnes of ore sourced
predominantly from the A-154 South kimberlite pipe, with small volumes sourced
from the A-154 North and A-418 kimberlite pipes. Rough diamond production
decreased 23% in the second calendar quarter from the prior year as the result
of the continuing grade variation in the A-154 South kimberlite pipe combined
with the initial stripping of low grade A-418 ore mixed with waste overburden
material.
    Ore was recovered from the A-418 kimberlite pipe as part of the ongoing
pre-stripping of waste overburden to prepare the pipe for open pit production.
This initial ore is low grade, weathered kimberlite capping the A-418 pipe,
diluted with overlying glacial till. Sustainable full-scale open pit
production from A-418 is scheduled to begin before the end of the calendar
year.
    Work continued on schedule and on budget to prepare the Diavik Diamond
Mine site for underground mining. Below surface, tunnelling work passed
8 kilometres, with tunnel advance rates accelerating during the second
calendar quarter. Construction progressed as planned on the new crusher and
paste backfill plant, on expansions to the water treatment and power plants,
and on additional permanent accommodation facilities. Diamond production from
underground mining is scheduled to begin in calendar 2009, and is expected to
replace open pit mining by calendar 2012.
    A $50 million capital expenditure for a small diamond recovery project
was approved during the second calendar quarter to make additions and
modifications to the ore processing plant to recover very small diamonds,
reflecting the demand for this product. The first recovery of small diamonds
is expected in calendar 2010. The Company estimates its share of this capital
expenditure to be approximately $20 million.

    
    Harry Winston Diamond Corporation's 40% Share of Diavik Diamond Mine
    Production

    (reported on a one-month lag)

                                         Three     Three       Six       Six
                                        Months    Months    Months    Months
                                         Ended     Ended     Ended     Ended
                                       June 30,  June 30,  June 30,  June 30,
                                          2008      2007      2008      2007
    -------------------------------------------------------------------------
    Diamonds recovered (000s carats)     1,009     1,317     1,723     2,351
    Grade (carats/tonne)                  3.52      5.12      3.74      5.05
    -------------------------------------------------------------------------
    

    Retail Segment

    For the three months ended July 2008, the retail segment recorded strong
results despite the tough economic and retail environment, a reflection of the
strength of the Harry Winston brand. Sales increased by 19% over the
comparable quarter of the prior year. Strong overall sales growth in the US
and international markets outside of Japan offset slower sales in the Japanese
market. Gross margin showed significant improvement from the first quarter as
a result of the mix of product sold as well as selective price increases
consistent with the direction of market trends. Harry Winston Inc. operated a
network of 18 retail salons during the quarter compared to 15 salons in the
comparable quarter of the prior year. A new salon was opened in August 2008 in
Costa Mesa, California.

    Liquidity and Capital Resources

    Working Capital

    As at July 31, 2008, the Company had unrestricted cash and cash
equivalents of $56.3 million and contingency cash collateral and reserves of
$25.3 million as required under the Company's debt arrangements, compared to
$49.6 million and $25.6 million, respectively, at January 31, 2008. The
Company had cash on hand and balances with banks of $56.3 million and
short-term investments of $nil at July 31, 2008 compared to $33.0 million and
$16.6 million, respectively, at January 31, 2008. Short-term investments are
held in overnight deposits. Total cash resources at July 31, 2008 were
$81.6 million, $6.4 million higher than the total cash resources of
$75.2 million at January 31, 2008.
    Working capital decreased to $212.7 million at July 31, 2008 from
$220.0 million at January 31, 2008.
    The Company's working capital and working capital requirements fluctuate
from quarter to quarter depending on, among other factors, the seasonality of
production at the Diavik Diamond Mine, the number of sales events conducted
during the quarter and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Diamond Mine in each quarter, along with
the seasonality and salon expansion in the retail segment. The Company's
principal working capital needs include investments in inventory, prepaid
expenses and other current assets, and accounts payable and income taxes
payable. The Company's cash requirements are driven by differences in the
timing of cash receipts and the cash outflows. The Company has the ability,
under certain conditions, to draw on its various credit facilities to finance
these timing differences.

    Cash Flow from Operations

    During the quarter ended July 31, 2008, the Company generated
$46.2 million in cash from operations, compared to $29.8 million in the
comparable quarter of the prior year.
    During the second quarter, the Company increased accounts receivable by
$6.5 million, decreased prepaid expenses and other current assets by
$6.0 million, increased inventory by $4.4 million, decreased accounts payable
and accrued liabilities by $3.9 million, and decreased income taxes payable by
$2.9 million.
    The liquidity and capital requirements of the Company vary by quarter
depending on the seasonal and production variability of its mining and retail
segments. Timing differences in cash flow are financed by drawing down on the
Company's credit facilities. Over the course of a fiscal year, the Company
does not expect the fluctuations to be material. Over the next two fiscal
years, capital requirements for the mining segment are expected to increase
significantly in accordance with the expected investment program at the Diavik
Diamond Mine. Thereafter, capital requirements for the mining segment are
expected to moderate and the mining segment is expected to generate sufficient
cash flow to finance its operations and capital expenditure requirements. The
capital requirements for the retail segment are ordinary in course and are not
expected to fluctuate materially over the next few years. The retail segment
will finance its operations and capital requirements during these years from
operating cash flow and its credit facilities. The Company may, from time to
time, supplement its liquidity by financing in the capital markets.

    Financing Activities

    During the second quarter, the Company repaid $14.7 million of its senior
secured term facilities. At July 31, 2008, the Company had $49.2 million
outstanding on its senior secured term credit facilities and $50.0 million
outstanding on its senior secured revolving credit facility. In comparison, at
January 31, 2008, $76.4 million was outstanding on the term credit facilities
and $50.0 million was outstanding on the secured revolving credit facility.
    As at July 31, 2008, Harry Winston Inc. had $166.1 million outstanding on
its $250.0 million secured five-year revolving credit facility, which is used
to fund salon inventory and capital expenditure requirements. This represents
an increase of $12.1 million from the amount outstanding at January 31, 2008.
    Also included in long-term debt of the Company's retail operations is a
25-year loan agreement for 17.5 million CHF used to finance the construction
of the new watch factory in Geneva, Switzerland. At July 31, 2008,
$16.6 million had been drawn against the facility compared to $16.1 million at
January 31, 2008. The bank has a secured interest in the factory building. On
June 26, 2008, the bank further extended a demand credit facility for
2.0 million CHF. The new facility is supported by a $2.0 million standby
letter of credit. At July 31, 2008, $0.2 million was drawn against this demand
credit facility.
    Harry Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to (Yen)2,075 million. At July 31, 2008,
$19.2 million had been drawn against these facilities, $4.6 million of which
is long term, payable on June 28, 2010, with the balance of $14.6 million
classified as bank advances. At January 31, 2008, $19.4 million had been drawn
against these facilities, $4.7 million of which is long term with the balance
of $14.7 million classified as bank advances.
    At July 31, 2008, $22.6 million and $6.4 million were drawn under the
Company's revolving financing facilities relating to its Belgian subsidiary,
Harry Winston Diamond International N.V., and its Israeli subsidiary, Harry
Winston Diamond (Israel) Limited, respectively. At January 31, 2008,
$10.5 million and $9.4 million were drawn under the Company's revolving
financing facilities relating to Harry Winston Diamond International N.V. and
Harry Winston Diamond (Israel) Limited, respectively.
    During the second quarter, the Company made dividend payments of
$3.1 million or $0.05 per share to its shareholders.

    Investing Activities

    During the second quarter, the Company purchased capital assets of
$67.7 million, of which $63.3 million were purchased for the mining segment
and $4.4 million for the retail segment.

    Contractual Obligations

    The Company has contractual payment obligations with respect to long-term
debt and, through its participation in the Joint Venture, future site
restoration costs at the Diavik Diamond Mine. Additionally, at the Joint
Venture, contractual obligations exist with respect to operating purchase
obligations, as administered by DDMI, the operator of the mine. In order to
maintain its 40% ownership interest in the Diavik Diamond Mine, the Company is
obligated to fund 40% of the Joint Venture's total expenditures on a monthly
basis. Based on the current mine plan, the Company's current projected share
of the planned capital expenditures at the Diavik Diamond Mine, which are not
reflected in the table below, including capital expenditures for the fiscal
years 2009 to 2013, is approximately $340 million assuming, among other
factors, a Canadian/US average exchange rate of $0.96 for the five years. The
most significant contractual obligations for the ensuing five-year period can
be summarized as follows:

    
    Contractual Obligations

    (expressed in thousands
     of United States                Less than      Year      Year     After
     dollars)                  Total    1 year       2-3       4-5   5 years
    -------------------------------------------------------------------------
    Long-term debt(a)(b)    $356,974  $ 82,810  $ 63,278  $ 20,807  $190,079
    Environmental and
     participation
     agreements incremental
     commitments(c)           95,445    74,994     3,906     1,953    14,592
    Operating lease
     obligations(d)          119,637    17,267    28,325    18,185    55,860
    Capital lease
     obligations(e)            1,984       921     1,063         -         -
    -------------------------------------------------------------------------
    Total contractual
     obligations            $574,040  $175,992  $ 96,572  $ 40,945  $260,531
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (a) Long-term debt presented in the foregoing table includes current and
        long-term portions. The mining segment's credit agreements are
        comprised of two senior secured term credit facilities and a senior
        secured revolving credit facility. The existing facilities have a
        maturity date of December 15, 2009. At July 31, 2008, $49.2 million
        in total was outstanding on the senior secured term credit
        facilities, and $50.0 million was outstanding on the senior secured
        revolving credit facility. Scheduled repayments on the senior secured
        term credit facilities commenced March 15, 2008 with $12.5 million in
        repayments due every quarter. The maximum amount permitted to be
        drawn under the senior secured revolving credit facility will be
        reduced by $12.5 million on a quarterly basis commencing March 15,
        2009.

        The Company's first mortgage on real property has scheduled principal
        payments of approximately $0.1 million quarterly, and may be prepaid
        after 2009. On July 31, 2008, $8.4 million was outstanding on the
        mortgage payable.

        On February 22, 2008, Harry Winston Inc. entered into a new credit
        agreement with a syndicate of banks for a $250.0 million, five-year
        revolving credit facility. There are no scheduled repayments required
        before maturity. At July 31, 2008, $166.1 million had been drawn
        against this secured credit facility which expires on March 31, 2013.

        Also included in long-term debt of Harry Winston Inc. is a 25-year
        loan agreement for 17.5 million CHF used to finance the construction
        of the new watch factory in Geneva, Switzerland. The bank has a
        secured interest in the factory building. The loan agreement is
        comprised of a 3.5 million CHF loan and a 14.0 million CHF loan. The
        3.5 million CHF loan bears interest at a rate of 3.9% and matures on
        April 22, 2010. The 14.0 million CHF loan bears interest at a rate of
        3.55% and matures on January 31, 2033, with quarterly payments
        commencing on June 30, 2008. At July 31, 2008, $16.6 million was
        outstanding on this loan agreement. On June 26, 2008, the bank
        further extended a demand credit facility for 2.0 million CHF. The
        new facility is supported by a $2.0 million standby letter of credit
        and bears interest at a rate of 5.0% per annum.

    (b) Interest on long-term debt is calculated at various fixed and
        floating rates. Projected interest payments on the current debt
        outstanding were based on interest rates in effect at July 31, 2008
        and have been included under long-term debt in the table above.
        Interest payments for the next 12 months are estimated to be
        $13.7 million.

    (c) The Joint Venture, under environmental and other agreements, must
        provide funding for the Environmental Monitoring Advisory Board.
        These agreements also state the Joint Venture must provide security
        deposits for the performance by the Joint Venture of its reclamation
        and abandonment obligations under all environmental laws and
        regulations. The Joint Venture has fulfilled its obligations for the
        security deposits by posting letters of credit of which the Company's
        share as at July 31, 2008 was $73.6 million. The requirement to post
        security for the reclamation and abandonment obligations may be
        reduced to the extent of amounts spent by the Joint Venture on those
        activities. The Joint Venture has also signed participation
        agreements with various native groups. These agreements are expected
        to contribute to the social, economic and cultural well-being of area
        Aboriginal bands. The amounts reflected as contractual obligations in
        the table above represent obligations that are in addition to the
        $73.6 million in letters of credit posted. The actual cash outlay for
        the Joint Venture's obligations under these agreements is not
        anticipated to occur until later in the life of the Diavik Diamond
        Mine.

    (d) Operating lease obligations represent future minimum annual rentals
        under non-cancellable operating leases for Harry Winston Inc. salons
        and office space.

    (e) Capital lease obligations represent future minimum annual rentals
        under non-cancellable capital leases for Harry Winston Inc. retail
        exhibit space.
    


    Outlook

    Mining

    Production

    Rough diamond production decreased 27% in the first half of the calendar
year from the prior year as a result of the continuing grade variation in the
A-154 South kimberlite pipe combined with the initial stripping of low grade
A-418 production of ore mixed with waste overburden material. The Company
expects the grade variation in the A-154 South kimberlite pipe to persist for
the balance of the year. Detailed sampling of the area already mined shows
sample grades ranging from as low as 2 carats per tonne to over 9 carats per
tonne, with an average of 4 carats per tonne. This short-range grade variation
within the longer range ore reserve is a common feature of diamond
mineralization due to the size range and distribution of the diamonds within
the host rock. This shortfall is not expected to persist through the balance
of the A-154 South kimberlite pipe. A program of detailed drilling to confirm
the A-154 South underground reserve grade will be undertaken from the pit
floor after open pit mining finishes. Given that it has been the active mining
area, there has been less definition drilling on this pipe than on A-154 North
and A-418 kimberlite pipes that make up the bulk of the underground mining
reserve.
    Although the estimated rough diamond production for calendar 2008 remains
at approximately 10.0 million to 10.5 million carats, the transition from
mining the bottom of the A-154 pit to the commencement of mining A-418 open
pit has attendant risks to achieving production goals. Third quarter
production to date from the A-154 South kimberlite pipe has been lower than
anticipated due to engineering challenges in mining the constricted final
benches of the A-154 open pit. Price increases achieved year to date suggest
that any potential production shortfall may be partially mitigated.
    Pre-stripping of the A-418 kimberlite pipe continues, with some
commercial production from the A-418 open pit anticipated by the end of the
calendar year. The expected start date of 2009 for underground production from
A-154 South, A-154 North and A-418 remains unchanged. These development
programs remain on schedule and on budget. The Company expects rough diamond
prices to remain robust with softness in the US being offset by strong demand
in the world economy, especially in the Far East.

    Cost of Sales

    The continuation of pre-stripping of the A-418 kimberlite pipe is
expected to result in lower cost of sales in calendar 2008 than previously
anticipated. Cost of sales will also be impacted by any reduction in
production from current estimates. The Company continues to expect cost of
sales to peak in calendar 2009, followed by an anticipated decline in cost of
sales over the following two years as the overlap between open pit and
underground mining diminishes.

    Capital Expenditures

    The surface and underground capital programs remain on schedule and on
budget. The Company expects to make capital contributions of approximately
$221 million during fiscal 2009 and 2010 in support of the underground
development project. Financing for this capital contribution is expected to be
drawn from a combination of cash from operations, proceeds from the March 2008
common share private placement and refinancing of the Company's credit
facility. Based on the current mine plan, the Company's portion of planned
capital expenditures at the Diavik Diamond Mine for fiscal 2009 to 2013 is
expected to be approximately $340 million at a Canadian/US dollar average
exchange rate of $0.96. Included in this capital contribution is $20 million
relating to the small diamond project approved in the second quarter of fiscal
2009. This project comprises additions and modifications to the ore processing
plant for the recovery of very small diamonds. This project has commenced,
with first recovery of small diamonds expected in calendar 2010.

    Rough Diamond Sales Cycle

    The Company is expecting to hold two primary rough diamond sales in the
third quarter and three in the fourth. Sales are now conducted throughout the
quarter in each of the Company's three selling offices located in Belgium,
Israel and India.

    Retail

    Harry Winston Inc. expects sales in the luxury jewelry industry to remain
robust. The retail segment is strategically well positioned to withstand
regional economic disruptions as a result of its diverse global distribution
network. Continued strong demand for luxury diamond jewelry and watches from
markets in Asia, Russia and the Middle East is expected to offset the
difficult retail environment in the US and Japanese markets. The sales
performance in the first six months of fiscal 2009 leaves us well positioned
to achieve our annual sales growth objective of in excess of 15%.
    Harry Winston Inc. will continue its plan to strengthen its brand and
expand its retail salon network and product offering over the next several
years. One salon was opened in Costa Mesa, California during August 2008.

    Related Parties

    Transactions with related parties for the three months ended July 31,
2008 include $0.3 million of rent ($0.7 million for the six months ended
July 31, 2008) relating to the New York salon, payable to a Harry Winston Inc.
employee.

    Critical Accounting Estimates

    Management is often required to make judgments, assumptions and estimates
in the application of Canadian generally accepted accounting principles that
have a significant impact on the financial results of the Company. Certain
policies are more significant than others and are, therefore, considered
critical accounting policies. Accounting policies are considered critical if
they rely on a substantial amount of judgment (use of estimates) in their
application or if they result from a choice between accounting alternatives
and that choice has a material impact on the Company's reported results or
financial position. There have been no changes to the Company's critical
accounting policies or estimates from those disclosed in the Company's MD&A
for its fiscal year ended January 31, 2008.

    Changes in Accounting Policies

    Capital Disclosures

    Effective February 1, 2008, the Company adopted new accounting
recommendations from the Canadian Institute of Chartered Accountants ("CICA"),
Handbook Section 1535, "Capital Disclosures". This new standard specifies the
requirements for disclosure of both qualitative and quantitative information
to enable users of financial statements to evaluate the Company's objectives,
policies and processes for managing capital. This disclosure is contained in
note 12 to the interim consolidated financial statements.

    Inventories

    Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3031, "Inventories", which
supersedes the previously issued standard on inventory. The new standard
introduces significant changes to the measurement and disclosure of inventory.
The measurement changes include: the elimination of LIFO, the requirement to
measure inventories at the lower of cost and net realizable value for
inventories that are not ordinarily interchangeable and goods or services
produced for specific purposes, the requirement for an entity to use a
consistent cost formula for inventory of a similar nature and use, and the
reversal of previous write-downs to net realizable value when there is a
subsequent increase in the value of inventories. Disclosures of inventories
have also been enhanced. Inventory policies, carrying amounts, amounts
recognized as an expense, write-downs and the reversals of write-downs are
required to be disclosed. This standard has had no material impact on the
consolidated financial statements.

    Financial Instruments

    Effective February 1, 2008, the Company adopted new accounting
recommendations from the CICA, Handbook Section 3862, "Financial Instruments -
Disclosures" and Handbook Section 3863, "Financial Instruments -
Presentation". Section 3862 provides guidance on disclosure of risks
associated with both recognized and unrecognized financial instruments and how
the Company manages these risks. Section 3863 details financial instruments
presentation requirements, which are unchanged from those discussed in
Section 3861, "Financial Instruments - Disclosure and Presentation". This
disclosure is contained in notes 13 and 14 to the interim consolidated
financial statements.

    Recently Issued Accounting Standards

    Goodwill and Intangibles

    On February 1, 2008 the CICA issued Handbook Section 3064, "Goodwill and
Intangible Assets". This Section establishes revised standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Concurrent with the introduction of this standard, the CICA
withdrew EIC 27, "Revenues and Expenses During the Pre-operating Period,"
which eliminates the ability for companies to defer costs and revenues
incurred prior to commercial production at new mine operations. The changes
are effective for interim and annual financial statements beginning January 1,
2009. The Company is currently assessing the impact of this standard on its
consolidated financial statements.

    International Financial Reporting Standards ("IFRS")

    The Company plans to report under International Financial Reporting
Standards ("IFRS") as of February 1, 2011. Changing from Canadian GAAP to IFRS
could materially affect the Company's reported financial position and results
of operations. During the second quarter of fiscal 2009, the Company commenced
preparation of its changeover plan. The Company intends to engage a third
party advisor to assist with the plan. Over the next few months, specific
actions include identifying the major accounting differences between current
Canadian GAAP and IFRS as they affect the Company and determining resource
requirements over the next two years as the Company implements its transition
plan.

    Risks and Uncertainties

    Harry Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations. In addition to the other
information contained in this Management's Discussion and Analysis and the
Company's other publicly filed disclosure documents, readers should give
careful consideration to the following risks, each of which could have a
material adverse effect on the Company's business prospects or financial
condition:

    Nature of Mining

    The operation of the Diavik Diamond Mine is subject to risks inherent in
the mining industry, including variations in grade and other geological
differences, unexpected problems associated with required water retention
dikes, water quality, surface and underground conditions, processing problems,
equipment performance, accidents, labour disputes, risks relating to the
physical security of the diamonds, force majeure risks and natural disasters.
Particularly with underground mining operations, inherent risks include
variations in rock structure and strength as it impacts on mining method
selection and performance, de-watering and water handling requirements,
achieving the required paste backfill strengths, and unexpected local ground
conditions. Hazards, such as unusual or unexpected rock formations, rock
bursts, pressures, collapses, flooding or other conditions, may be encountered
during mining. Such risks could result in personal injury or fatality; damage
to or destruction of mining properties, processing facilities or equipment;
environmental damage; delays, suspensions or permanent reductions in mining
production; monetary losses; and possible legal liability.
    The Diavik Diamond Mine, because of its remote northern location and
access only by winter road or by air, is subject to special climate and
transportation risks. These risks include the inability to operate or to
operate efficiently during periods of extreme cold, the unavailability of
materials and equipment, and increased transportation costs due to the late
opening and/or early closure of the winter road. Such factors can add to the
cost of mine development, production and operation and/or impair production
and mining activities, thereby affecting the Company's profitability.

    Nature of Joint Arrangement with DDMI

    The Company owns an undivided 40% interest in the assets, liabilities and
expenses of the Diavik Diamond Mine and the Diavik group of mineral claims.
The Diavik Diamond Mine and the exploration and development of the Diavik
group of mineral claims is a joint arrangement between DDMI (60%) and Harry
Winston Diamond Mines Ltd. (40%), and is subject to the risks normally
associated with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic decisions
made in respect of the Diavik Diamond Mine and the Diavik group of mineral
claims. By virtue of DDMI's 60% interest in the Diavik Diamond Mine, it has a
controlling vote in virtually all Joint Venture management decisions
respecting the development and operation of the Diavik Diamond Mine and the
development of the Diavik group of mineral claims. Accordingly, DDMI is able
to determine the timing and scope of future project capital expenditures, and
therefore is able to impose capital expenditure requirements on the Company
that the Company may not have sufficient cash to meet. The Company's
contribution to capital requirements to complete the underground development
and supporting infrastructure contemplated by the new mine plan is estimated
to be $221 million during fiscal 2009 and 2010, with funding expected to be
provided in part from a CAD $75 million private placement completed on
March 14, 2008, cash flow from operations and a refinancing of the Company's
credit facilities. There can be no assurance that the Company will be able to
refinance its current credit facilities on satisfactory terms and conditions,
or at all. A failure by the Company to meet capital expenditure requirements
imposed by DDMI could result in the Company's interest in the Diavik Diamond
Mine and the Diavik group of mineral claims being diluted.

    Diamond Prices and Demand for Diamonds

    The profitability of the Company is dependent upon production from the
Diavik Diamond Mine and on the results of the operations of its retail
operations. Each in turn is dependent in significant part upon the worldwide
demand for and price of diamonds. Diamond prices fluctuate and are affected by
numerous factors beyond the control of the Company, including worldwide
economic trends, particularly in the US, Japan, China and India, worldwide
levels of diamond discovery and production and the level of demand for, and
discretionary spending on, luxury goods such as diamonds and jewelry. Low or
negative growth in the worldwide economy, prolonged credit market disruptions
or the occurrence of terrorist or similar activities creating disruptions in
economic growth could result in decreased demand for luxury goods such as
diamonds and jewelry, thereby negatively affecting the price of diamonds and
jewelry. Similarly, a substantial increase in the worldwide level of diamond
production could also negatively affect the price of diamonds. In each case,
such developments could materially adversely affect the Company's results of
operations.

    Currency Risk

    Currency fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the US dollar
price, and although the Company reports its financial results in US dollars, a
majority of the costs and expenses of the Diavik Diamond Mine, which are borne
40% by the Company, are incurred in Canadian dollars. Further, the Company has
a significant future income tax liability that has been incurred and will be
payable in Canadian dollars. The Company's currency exposure relates primarily
to expenses and obligations incurred by it in Canadian dollars and,
secondarily, to revenues of Harry Winston Inc. in currencies other than the US
dollar. The appreciation of the Canadian dollar against the US dollar, and the
depreciation of such other currencies against the US dollar, therefore, will
increase the expenses of the Diavik Diamond Mine and the amount of the
Company's Canadian dollar liabilities relative to the revenue the Company will
receive from diamond sales, and will decrease the US dollar revenues received
by Harry Winston Inc. From time to time, the Company may use a limited number
of derivative financial instruments to manage its foreign currency exposure.

    Licenses and Permits

    The operation of the Diavik Diamond Mine and exploration on the Diavik
property require licenses and permits from the Canadian government. Renewal of
the Diavik Diamond Mine Type "A" Water License was granted by the regional
Wek'eezhii Land and Water Board on November 1, 2007 for an eight-year period.
While the Company anticipates that DDMI, which is also the operator of the
Diavik Diamond Mine, will be able to renew this license and other necessary
permits in the future, there can be no guarantee that DDMI will be able to do
so or obtain or maintain all other necessary licenses and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to further
explore and develop the Diavik property.

    Regulatory and Environmental Risks

    The operation of the Diavik Diamond Mine, exploration activities at the
Diavik Project and the manufacturing of jewelry and watches are subject to
various laws and regulations governing the protection of the environment,
exploration, development, production, taxes, labour standards, occupational
health, waste disposal, mine safety, manufacturing safety and other matters.
New laws and regulations, amendments to existing laws and regulations, or more
stringent implementation or changes in enforcement policies under existing
laws and regulations could have a material adverse impact on the Company by
increasing costs and/or causing a reduction in levels of production from the
Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as
the Company's international operations expand, it or its subsidiaries become
subject to laws and regulatory regimes which differ materially from those
under which they operate in Canada and the US.
    Mining and manufacturing are subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste
products occurring as a result of mining and manufacturing operations. To the
extent that the Company's operations are subject to uninsured environmental
liabilities, the payment of such liabilities could have a material adverse
effect on the Company.

    Climate Change

    Canada ratified the Kyoto Protocol to the United Nations Framework
Convention on Climate Change in late 2002 and the Kyoto Protocol came into
effect in Canada in February 2005. The Canadian government is currently
developing a number of policy measures in order to meet its emission reduction
guidelines. While the impact of these measures cannot be quantified at this
time, the likely effect will be to increase costs for fossil fuels,
electricity and transportation, restrict industrial emission levels, impose
added costs for emissions in excess of permitted levels and increase costs for
monitoring and reporting. Compliance with these initiatives could have a
material adverse effect on the Company's results of operations.

    Resource and Reserve Estimates

    The Company's figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can be given
that the anticipated carats will be recovered. The estimation of reserves is a
subjective process. Forecasts are based on engineering data, projected future
rates of production and the timing of future expenditures, all of which are
subject to numerous uncertainties and various interpretations. The Company
expects that its estimates of reserves will change to reflect updated
information. Reserve estimates may be revised upward or downward based on the
results of current and future drilling, testing or production levels and on
changes in mine design. In addition, market fluctuations in the price of
diamonds or increases in the costs to recover diamonds from the Diavik Diamond
Mine may render the mining of ore reserves uneconomical.
    Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Due to the uncertainty that may attach to inferred mineral
resources, there is no assurance that mineral resources at the Diavik property
will be upgraded to proven and probable ore reserves.

    Insurance

    The Company's business is subject to a number of risks and hazards,
including adverse environmental conditions, industrial accidents, labour
disputes, unusual or unexpected geological conditions, risks relating to the
physical security of diamonds and jewelry held as inventory or in transit,
changes in the regulatory environment and natural phenomena such as inclement
weather conditions. Such occurrences could result in damage to the Diavik
Diamond Mine, personal injury or death, environmental damage to the Diavik
property, delays in mining, closing of Harry Winston Inc.'s manufacturing
facilities or salons, monetary losses and possible legal liability. Although
insurance is maintained to protect against certain risks in connection with
the Diavik Diamond Mine and, the Company's operations, the insurance in place
will not cover all potential risks. It may not be possible to maintain
insurance to cover insurable risks at economically feasible premiums.

    Fuel Costs

    The Diavik Diamond Mine's expected fuel needs are purchased periodically
during the year for storage, and transported to the mine site by way of the
winter road. These costs will increase if transportation by air freight is
required due to a shortened "winter road season" or unexpectedly high fuel
usage.
    The cost of the fuel purchased is based on the then prevailing price and
expensed into operating costs on a usage basis. The Diavik Diamond Mine
currently has no hedges for its future anticipated fuel consumption.

    Reliance on Skilled Employees

    Production at the Diavik Diamond Mine is dependent upon the efforts of
certain skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled employees may
adversely affect the level of diamond production from the Diavik Diamond Mine.
Currently, there is significant competition for skilled workers in remote
northern operations due to the significant number of large-scale construction
projects ongoing and planned in Canada's north, including the various
construction projects relating to the development of the oil sands in northern
Alberta.
    The Company's success at marketing rough diamonds and in operating the
business of Harry Winston Inc. is dependent on the services of key executives
and skilled employees, as well as the continuance of key relationships with
certain third parties, such as diamantaires. The loss of these persons or the
Company's inability to attract and retain additional skilled employees or to
establish and maintain relationships with required third parties may adversely
affect its business and future operations in marketing diamonds and in
operating its retail segment.

    Expansion of the Existing Salon Network

    A key component of the Company's retail strategy is the expansion of its
existing salon network. This strategy requires the Company to make ongoing
capital expenditures to build and open new salons, to refurbish existing
salons from time to time, and to incur additional operating expenses in order
to operate the new salons. To date, much of this expansion has been financed
through borrowings by Harry Winston Inc. There can be no assurance that the
expansion of the salon network will prove successful in increasing annual
sales or earnings from the retail segment, and the increased debt levels
resulting from this expansion could negatively impact the Company's liquidity
and its results from operations in the absence of increased sales and
earnings.

    Competition in the Luxury Jewelry Segment

    The Company is exposed to competition in the retail diamond market from
other luxury goods, diamond, jewelry and watch retailers. The ability of Harry
Winston Inc. to successfully compete with such luxury goods, diamond, jewelry
and watch retailers is dependent upon a number of factors, including the
ability to source high-end polished diamonds and protect and promote its
distinctive brand name and reputation. If Harry Winston Inc. is unable to
successfully compete in the luxury jewelry segment, then the Company's results
of operations will be adversely affected.

    
    Outstanding Share Information

    As at July 31, 2008
    -------------------------------------------------------------------------
    Authorized                                                     Unlimited
    Issued and outstanding shares                                 61,372,091
    Options outstanding                                            1,619,338
    Fully diluted                                                 62,991,429
    -------------------------------------------------------------------------
    

    Additional Information

    Additional information relating to the Company, including the Company's
most recently filed annual information form, can be found on SEDAR at
www.sedar.com, and is also available on the Company's website at
http://investor.harrywinston.com.


    
                         Consolidated Balance Sheets
              (expressed in thousands of United States dollars)

                                                       July 31,   January 31,
                                                          2008          2008
                                                    (unaudited)
    -------------------------------------------------------------------------
    Assets

    Current assets:
      Cash and cash equivalents (note 3)          $     56,318  $     49,628
      Cash collateral and cash reserves (note 3)        25,303        25,615
      Accounts receivable                               30,152        25,505
      Inventory and supplies (note 4)                  345,213       322,228
      Prepaid expenses and other current assets         59,609        58,617
    -------------------------------------------------------------------------
                                                       516,595       481,593
    Mining capital assets                              765,996       658,200
    Retail capital assets                               73,667        70,617
    Intangible assets, net (note 6)                    131,574       132,628
    Goodwill                                            93,780        93,780
    Other assets                                        16,603        16,167
    Future income tax asset                             38,302        40,963
    -------------------------------------------------------------------------
                                                  $  1,636,517  $  1,493,948
                                                  ---------------------------
                                                  ---------------------------
    Liabilities and Shareholders' Equity

    Current liabilities:
      Accounts payable and accrued liabilities    $    137,069  $    124,426
      Income taxes payable                              54,013        48,118
      Bank advances                                     43,742        34,928
      Current portion of long-term debt (note 7)        69,121        54,137
    -------------------------------------------------------------------------
                                                       303,945       261,609
    Long-term debt (note 7)                            225,403       255,212
    Future income tax liability                        356,079       370,500
    Other long-term liability                            2,015         1,730
    Future site restoration costs                       33,826        32,980
    Minority interest                                      257           255

    Shareholders' equity:
      Share capital (note 8)                           381,541       305,502
      Contributed surplus                               15,906        15,614
      Retained earnings                                290,398       225,334
      Accumulated other comprehensive income            27,147        25,212
    -------------------------------------------------------------------------

                                                       714,992       571,662
    Commitments and guarantees (note 9)
    -------------------------------------------------------------------------

                                                  $  1,636,517  $  1,493,948
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements.



                     Consolidated Statements of Earnings
              (expressed in thousands of United States dollars,
                    except per share amounts) (unaudited)

                      Three Months  Three Months    Six Months    Six Months
                             Ended         Ended         Ended         Ended
                           July 31,      July 31,      July 31,      July 31,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Sales             $    186,119  $    173,269  $    342,198  $    314,634
    Cost of sales
     (note 15)              73,542        81,827       146,691       152,959
    -------------------------------------------------------------------------
    Gross margin           112,577        91,442       195,507       161,675
    Selling, general
     and administrative
     expenses               39,194        35,201        82,479        69,412
    -------------------------------------------------------------------------
    Earnings from
     operations             73,383        56,241       113,028        92,263
    -------------------------------------------------------------------------
    Interest and
     financing expenses     (5,366)       (7,222)      (10,819)      (13,354)
    Other income               815           545         1,061         1,458
    Foreign exchange
     gain (loss)             5,301       (11,785)        5,456       (25,077)
    -------------------------------------------------------------------------
    Earnings before
     income taxes           74,133        37,779       108,726        55,290
    Income tax expense
     - Current              27,589        25,091        49,089        42,531
    Income tax recovery
     - Future               (3,404)       (7,344)      (11,568)      (10,666)
    -------------------------------------------------------------------------
    Earnings before
     minority interest      49,948        20,032        71,205        23,425
    Minority interest            1           (26)            2           114
    -------------------------------------------------------------------------
    Net earnings      $     49,947  $     20,058  $     71,203  $     23,311
                      -------------------------------------------------------
                      -------------------------------------------------------
    Earnings per share
      Basic           $       0.81  $       0.34  $       1.17  $       0.40
                      -------------------------------------------------------
                      -------------------------------------------------------
      Fully diluted   $       0.81  $       0.33  $       1.17  $       0.39
                      -------------------------------------------------------
                      -------------------------------------------------------
    Weighted average
     number of shares
     outstanding        61,372,091    58,371,004    60,655,424    58,366,574
                      -------------------------------------------------------
                      -------------------------------------------------------

    See accompanying notes to consolidated financial statements.



               Consolidated Statements of Comprehensive Income
        (expressed in thousands of United States dollars) (unaudited)

                      Three Months  Three Months    Six Months    Six Months
                             Ended         Ended         Ended         Ended
                           July 31,      July 31,      July 31,      July 31,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Net earnings      $     49,947  $     20,058  $     71,203  $     23,311
    Other comprehensive
     income
    Net gain on
     translation of
     foreign operations
     (net of tax - nil)       (654)          609         1,935         2,600
    -------------------------------------------------------------------------
    Total comprehensive
     income           $     49,293  $     20,667  $     73,138  $     25,911
                      -------------------------------------------------------
                      -------------------------------------------------------

    See accompanying notes to consolidated financial statements.



         Consolidated Statements of Changes in Shareholders' Equity
        (expressed in thousands of United States dollars) (unaudited)

                      Three Months  Three Months    Six Months    Six Months
                             Ended         Ended         Ended         Ended
                           July 31,      July 31,      July 31,      July 31,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Common shares:
    Balance at
     beginning of
     period           $    381,541  $    305,208  $    305,502  $    305,165
    Issued during the
     period                      -           294        76,039           337
    -------------------------------------------------------------------------
    Balance at end
     of period             381,541       305,502       381,541       305,502
    -------------------------------------------------------------------------
    Contributed surplus:
    Balance at beginning
     of period              15,769        15,107        15,614        14,922
    Stock option expense       137           132           292           317
    -------------------------------------------------------------------------
    Balance at end
     of period              15,906        15,239        15,906        15,239
    -------------------------------------------------------------------------
    Retained earnings:
    Balance at beginning
     of period             243,521       154,285       225,334       165,625
    Net earnings            49,947        20,058        71,203        23,311
    Dividends paid          (3,070)      (14,591)       (6,139)      (29,184)
    -------------------------------------------------------------------------
    Balance at end
     of period             290,398       159,752       290,398       159,752
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive
     income:
    Balance at beginning
     of period              27,801        18,007        25,212        16,016
    Other comprehensive
     income
      Net gain on
       translation of
       foreign
       operations (net
       of tax - nil)          (654)          609         1,935         2,600
    -------------------------------------------------------------------------
    Balance at end
     of period              27,147        18,616        27,147        18,616
    -------------------------------------------------------------------------
    Total shareholders'
     equity           $    714,992  $    499,109  $    714,992  $    499,109
                      -------------------------------------------------------
                      -------------------------------------------------------

    See accompanying notes to consolidated financial statements.



                    Consolidated Statements of Cash Flows
        (expressed in thousands of United States dollars) (unaudited)

                      Three Months  Three Months    Six Months    Six Months
                             Ended         Ended         Ended         Ended
                           July 31,      July 31,      July 31,      July 31,
                              2008          2007          2008          2007
    -------------------------------------------------------------------------
    Cash provided by
     (used in):

    Operating
    Net earnings      $     49,947  $     20,058  $     71,203  $     23,311
    Items not
     involving cash:
      Amortization
       and accretion        16,778        20,054        30,733        39,657
      Future income
       taxes                (3,404)       (7,344)      (11,568)      (10,538)
      Stock-based
       compensation
       and pension
       expense                 222           132           579         1,405
      Foreign exchange      (5,677)       11,439        (6,251)       24,901
      Loss on disposal
       of assets                19             -           489             -
    Minority interest            1           (26)            2           114
    Change in non-cash
     operating working
     capital               (11,679)      (14,507)       (4,671)      (34,726)
    -------------------------------------------------------------------------
                            46,207        29,806        80,516        44,124
    -------------------------------------------------------------------------
    Financing
    Decrease in long-
     term debt             (14,691)       (5,368)      (27,168)       (8,994)
    Increase in
     revolving credit       25,235        35,734       180,425        54,746
    Repayment of Harry
     Winston Inc.
     revolving credit            -                    (159,109)
    Dividends paid          (3,070)      (14,591)       (6,139)      (29,184)
    Issue of common
     shares                      -           294        76,039           337
    -------------------------------------------------------------------------
                             7,474        16,069        64,048        16,905
    -------------------------------------------------------------------------
    Investing
    Cash collateral
     and cash reserve        8,635        13,679           312        25,938
    Mining capital
     assets                (63,284)      (39,761)     (129,908)      (72,630)
    Retail capital
     assets                 (4,413)       (8,556)       (7,656)      (17,034)
    Other assets                 -           345            (1)         (745)
    -------------------------------------------------------------------------
                           (59,062)      (34,293)     (137,253)      (64,471)
    -------------------------------------------------------------------------
    Foreign exchange
     effect on cash
     balances                  (77)          538          (621)          916
    Increase/(decrease)
     in cash and cash
     equivalents            (5,458)       12,120         6,690        (2,526)
    Cash and cash
     equivalents,
     beginning of
     period (note 3)        61,776        39,528        49,628        54,174
    -------------------------------------------------------------------------
    Cash and cash
     equivalents,
     end of period
     (note 3)         $     56,318  $     51,648  $     56,318  $     51,648
                      -------------------------------------------------------
                      -------------------------------------------------------
    Change in non-cash
     operating working
     capital
    Accounts receivable     (6,459)         (993)       (4,727)       (5,279)
    Prepaid expenses
     and other
     current assets          5,969       (15,646)        1,534       (14,135)
    Inventory and
     supplies               (4,409)       (3,995)      (22,986)      (47,576)
    Accounts payable
     and accrued
     liabilities            (3,864)      (11,744)       14,835         7,166
    Income tax payable      (2,916)       17,871         6,673        25,098
    -------------------------------------------------------------------------
                      $    (11,679) $    (14,507) $     (4,671) $    (34,726)
    -------------------------------------------------------------------------
    Supplemental cash
     flow information
    Cash taxes paid   $     30,373  $      2,305  $     42,568  $      3,041
    Cash interest
     paid             $      4,390  $      5,463  $      8,798  $     11,206
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



                 Notes to Consolidated Financial Statements

    July 31, 2008 with comparative figures (tabular amounts in thousands
            of United States dollars, except as otherwise noted)

    NOTE 1:

    Nature of Operations

    Harry Winston Diamond Corporation (the "Company") is a specialist diamond
    company focusing on the mining and retail segments of the diamond
    industry.

    The Company's most significant asset is a 40% interest in the Diavik
    group of mineral claims. The Diavik Joint Venture (the "Joint Venture")
    is an unincorporated joint arrangement between Diavik Diamond Mines Inc.
    ("DDMI") (60%) and Harry Winston Diamond Mines Ltd. (40%). DDMI is the
    operator of the Diavik Diamond Mine. Both companies are headquartered in
    Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc
    of London, England, and Harry Winston Diamond Mines Ltd. is a wholly
    owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.
    The Diavik Diamond Mine is located 300 kilometres northeast of
    Yellowknife in the Northwest Territories. The Company records its
    proportionate interest in the assets, liabilities and expenses of the
    Joint Venture in the Company's financial statements with a one-month lag.

    The Company also owns a 100% interest in Harry Winston Inc., the premier
    fine jewelry and watch retailer. The results of Harry Winston Inc.,
    located in New York City, US, are consolidated in the financial
    statements of the Company.

    Certain comparative figures have been reclassified to conform with the
    current year's presentation.

    NOTE 2:

    Significant Accounting Policies

    The interim consolidated financial statements are prepared by management
    in accordance with accounting principles generally accepted in Canada.
    The interim consolidated financial statements include the accounts of the
    Company and all of its subsidiaries as well as its proportionate interest
    in the assets, liabilities and expenses of joint arrangements.
    Intercompany transactions and balances have been eliminated.

    The interim consolidated financial statements should be read in
    conjunction with the consolidated financial statements and the notes
    thereto in the Company's Annual Report for the year ended January 31,
    2008, since these interim financial statements do not include all
    disclosures required by Canadian generally accepted accounting principles
    ("GAAP"). Excluding adoption of the new accounting standards described
    below, these statements have been prepared following the same accounting
    policies and methods of computation as the consolidated financial
    statements for the year ended January 31, 2008.

    Adoption of New Accounting Standards and Developments

    Capital Disclosures

    Effective February 1, 2008, the Company adopted new accounting
    recommendations from the Canadian Institute of Chartered Accountants
    ("CICA"), Handbook Section 1535, "Capital Disclosures". This new standard
    specifies the requirements for disclosure of both qualitative and
    quantitative information to enable users of financial statements to
    evaluate the Company's objectives, policies and processes for managing
    capital. This disclosure is contained in note 12 to the interim
    consolidated financial statements.

    Inventories

    Effective February 1, 2008, the Company adopted new accounting
    recommendations from the CICA, Handbook Section 3031, "Inventories",
    which supersedes the previously issued standard on inventory. The new
    standard introduces significant changes to the measurement and disclosure
    of inventory. The measurement changes include: the elimination of LIFO,
    the requirement to measure inventories at the lower of cost and net
    realizable value for inventories that are not ordinarily interchangeable
    and goods or services produced for specific purposes, the requirement for
    an entity to use a consistent cost formula for inventory of a similar
    nature and use, and the reversal of previous write-downs to net
    realizable value when there is a subsequent increase in the value of
    inventories. Disclosures of inventories have also been enhanced.
    Inventory policies, carrying amounts, amounts recognized as an expense,
    write-downs and the reversals of write-downs are required to be
    disclosed. This standard has had no material impact on the consolidated
    financial statements.

    Financial Instruments

    Effective February 1, 2008, the Company adopted new accounting
    recommendations from the CICA, Handbook Section 3862, "Financial
    Instruments - Disclosures" and Handbook Section 3863, "Financial
    Instruments - Presentation". Section 3862 provides guidance on disclosure
    of risks associated with both recognized and unrecognized financial
    instruments and how the Company manages these risks. Section 3863 details
    financial instruments presentation requirements, which are unchanged from
    those discussed in Section 3861, "Financial Instruments - Disclosure and
    Presentation". This disclosure is contained in notes 13 and 14 to the
    interim consolidated financial statements.

    Recently Issued Accounting Standards

    Goodwill and Intangibles

    On February 1, 2008 the CICA issued Handbook Section 3064, "Goodwill and
    Intangible Assets". This Section establishes revised standards for the
    recognition, measurement, presentation and disclosure of goodwill and
    intangible assets. Concurrent with the introduction of this standard, the
    CICA withdrew EIC 27, "Revenues and Expenses During the Pre-operating
    Period," which eliminates the ability for companies to defer costs and
    revenues incurred prior to commercial production at new mine operations.
    The changes are effective for interim and annual financial statements
    beginning January 1, 2009. The Company is currently assessing the impact
    of this standard on its consolidated financial statements.

    International Financial Reporting Standards ("IFRS")

    The Company plans to report under International Financial Reporting
    Standards ("IFRS") as of February 1, 2011. Changing from Canadian GAAP to
    IFRS could materially affect the Company's reported financial position
    and results of operations. During the second quarter of fiscal 2009, the
    Company commenced preparation of its changeover plan. The Company intends
    to engage a third party advisor to assist with the plan. Over the next
    few months, specific actions include identifying the major accounting
    differences between current Canadian GAAP and IFRS as they affect the
    Company and determining resource requirements over the next two years as
    the Company implements its transition plan.

    NOTE 3:

    Cash Resources

                                                       July 31,   January 31,
                                                          2008          2008
    -------------------------------------------------------------------------
    Cash on hand and balances with banks          $     56,318  $     33,028
    Short-term investments(a)                                -        16,600
    -------------------------------------------------------------------------
    Total cash and cash equivalents                     56,318        49,628
    Cash collateral and cash reserves                   25,303        25,615
    -------------------------------------------------------------------------
    Total cash resources                          $     81,621  $     75,243
                                                  ---------------------------
                                                  ---------------------------

    (a) Short-term investments are held in overnight deposits.


    NOTE 4:

    Inventory and Supplies

                                                       July 31,   January 31,
                                                          2008          2008
    -------------------------------------------------------------------------
    Rough diamond inventory                       $     13,169  $     17,097
    Merchandise inventory                              260,202       254,101
    Supplies inventory                                  71,842        51,030
    -------------------------------------------------------------------------
    Total inventory and supplies                  $    345,213  $    322,228
                                                  ---------------------------
                                                  ---------------------------

    NOTE 5:

    Diavik Joint Venture

    The following represents Harry Winston Diamond Corporation's 40%
    proportionate interest in the Joint Venture as at June 30, 2008 and
    December 31, 2007:

                                                       July 31,   January 31,
                                                          2008          2008
    -------------------------------------------------------------------------
    Current assets                                $    123,496  $    110,199
    Long-term assets                                   714,708       605,300
    Current liabilities                                 48,504        40,631
    Long-term liabilities and participant's account    789,700       674,868
    -------------------------------------------------------------------------


                                   Three       Three         Six         Six
                                  Months      Months      Months      Months
                                   Ended       Ended       Ended       Ended
                                 July 31,    July 31,    July 31,    July 31,
                                    2008        2007        2008        2007
    -------------------------------------------------------------------------
    Expenses net of interest
     income of $0.1 million
     (2007 - $0.1 million)
     (a)(b)                       43,671      47,609      77,630      87,710
    Cash flows resulting
     from (used in)
     operating activities        (33,830)    (39,941)    (61,221)    (83,983)
    Cash flows resulting from
     financing activities         86,377      79,454     175,501     143,726
    Cash flows resulting from
     (used in) investing
     activities                  (50,181)    (38,191)   (114,973)    (67,813)
    -------------------------------------------------------------------------
    (a) The Joint Venture only earns interest income.
    (b) Expenses net of interest income for the six months ended July 31,
        2008 of $0.2 million (2007 - $0.2 million).


    The Company is contingently liable for the other participant's portion of
    the liabilities of the Joint Venture and to the extent the Company's
    participating interest has increased because of the failure of the other
    participant to make a cash contribution when required, the Company would
    have access to an increased portion of the assets of the Joint Venture to
    settle these liabilities.

    NOTE 6:

    Intangible Assets

                                                 Accum-
                                                ulated       July    January
                    Amortization                Amorti-        31,        31,
                          Period       Cost     zation   2008 net   2008 net
    -------------------------------------------------------------------------
    Trademark    indefinite life  $ 112,995  $       -  $ 112,995  $ 112,995
    Drawings     indefinite life     12,365          -     12,365     12,365
    Wholesale
     distribution
     network          120 months      5,575     (1,647)     3,928      4,206
    Store
     leases     65 to 105 months      5,639     (3,353)     2,286      3,062
    -------------------------------------------------------------------------
    Intangible assets             $ 136,574  $  (5,000) $ 131,574  $ 132,628
                                  -------------------------------------------
                                  -------------------------------------------

    Amortization expense for the six months ended July 31, 2008 was
    $1.1 million (2007 - $0.8 million).

    NOTE 7:

    Long-Term Debt

                                                       July 31,   January 31,
                                                          2008          2008
    -------------------------------------------------------------------------
    Mining credit facilities                      $     98,790  $    125,677
    Retail credit facilities and loans                 187,351       174,850
    First mortgage on real property                      8,383         8,822
    -------------------------------------------------------------------------
    Total long-term debt                               294,524       309,349
    -------------------------------------------------------------------------
    Less current portion                               (69,121)      (54,137)
    -------------------------------------------------------------------------
                                                  $    225,403  $    255,212
                                                  ---------------------------
                                                  ---------------------------

    On February 22, 2008, Harry Winston Inc. entered into a new credit
    agreement with a syndicate of banks for a $250.0 million, five-year
    revolving credit facility. There are no scheduled repayments required
    before maturity. At July 31, 2008, $166.1 million had been drawn against
    this secured credit facility, which expires on March 31, 2013.

    NOTE 8:

    Share Capital

    (a) Authorized

        Unlimited common shares without par value.

    (b) Issued

                                                       Number of
                                                          Shares      Amount
        ---------------------------------------------------------------------
        Balance, January 31, 2008                     58,372,091   $ 305,502
        Shares issued for:
          Cash                                         3,000,000      76,039
        ---------------------------------------------------------------------
        Balance, July 31, 2008                        61,372,091   $ 381,541
                                                      -----------------------
                                                      -----------------------

    (c) RSU and DSU Plans

        RSU                                                  Number of Units
        ---------------------------------------------------------------------
        Balance, January 31, 2008                                    143,715
        Awards and payouts during the period (net):
          RSU awards (net of forfeitures)                             (4,805)
          RSU payouts                                                (32,616)
        ---------------------------------------------------------------------
        Balance, July 31, 2008                                       106,294
                                                      -----------------------
                                                      -----------------------


        DSU                                                  Number of Units
        ---------------------------------------------------------------------
        Balance, January 31, 2008                                     72,198
        Awards during the period (net):
          DSU awards                                                  20,715
        ---------------------------------------------------------------------
        Balance, July 31, 2008                                        92,913
                                                      -----------------------
                                                      -----------------------


                                   Three       Three         Six         Six
                                  Months      Months      Months      Months
                                   Ended       Ended       Ended       Ended
                                 July 31,    July 31,    July 31,    July 31,
        Expense for the Period      2008        2007        2008        2007
        ---------------------------------------------------------------------
        RSU                   $     (174) $      295  $      335  $      460
        DSU                         (330)         76         237           3
        ---------------------------------------------------------------------
                              $     (504) $      371  $      572  $      463
                              -----------------------------------------------
                              -----------------------------------------------

        During the six months ended July 31, 2008, the Company granted
        (4,805) RSUs (net of forfeitures) and 20,715 DSUs under an employee
        and director incentive compensation program, respectively. The RSU
        and DSU Plans are full value phantom shares that mirror the value of
        Harry Winston Diamond Corporation's publicly traded common shares. In
        addition, 32,616 RSUs vested during the six months ended July 31,
        2008, resulting in a payout of $0.8 million.

        Grants under the RSU Plan are on a discretionary basis to employees
        of the Company subject to Board of Director approval. Each RSU grant
        vests on the third anniversary of the grant date, subject to special
        rules for death and disability. The Company anticipates paying out
        cash on maturity of RSUs and DSUs.

        Only non-executive directors of the Company are eligible for grants
        under the DSU Plan. Each DSU grant vests immediately on the grant
        date.

        The expenses related to RSUs and DSUs are accrued based on the price
        of Harry Winston Diamond Corporation's common shares at the end of
        the period and on the probability of vesting. This expense is
        recognized on a straight-line basis over the term of vesting.

    NOTE 9:

    Commitments and Guarantees

    (a) Environmental Agreement

        Through negotiations of environmental and other agreements, the Joint
        Venture must provide funding for the Environmental Monitoring
        Advisory Board. The Company's share of this funding requirement was
        $0.2 million for calendar 2008. Further funding will be required in
        future years; however, specific amounts have not yet been determined.
        These agreements also state that the Joint Venture must provide
        security deposits for the performance by the Joint Venture of its
        reclamation and abandonment obligations under all environmental laws
        and regulations. The Company's share of the Joint Venture's letters
        of credit outstanding with respect to the environmental agreements as
        at July 31, 2008 was $73.6 million. The agreement specifically
        provides that these funding obligations will be reduced by amounts
        incurred by the Joint Venture on reclamation and abandonment
        activities.

    (b) Participation Agreements

        The Joint Venture has signed participation agreements with various
        native groups. These agreements are expected to contribute to the
        social, economic and cultural well-being of the Aboriginal bands. The
        agreements are each for an initial term of twelve years and shall be
        automatically renewed on terms to be agreed for successive periods of
        six years thereafter until termination. The agreements terminate in
        the event the mine permanently ceases to operate.

    (c) Commitments

        Commitments include the cumulative maximum funding commitments
        secured by letters of credit of the Joint Venture's environmental and
        participation agreements at the Company's 40% share, before any
        reduction of future reclamation activities, and future minimum annual
        rentals under non-cancellable operating and capital leases for retail
        salons and corporate office space, and are as follows:

        2009                                                    $     93,182
        2010                                                          93,974
        2011                                                          91,261
        2012                                                          89,961
        2013                                                          89,149
        Thereafter                                                   151,305
        ---------------------------------------------------------------------

    NOTE 10:

    Employee Benefit Plans

                                   Three       Three         Six         Six
                                  Months      Months      Months      Months
                                   Ended       Ended       Ended       Ended
                                 July 31,    July 31,    July 31,    July 31,
    Expenses for the Period         2008        2007        2008        2007
    -------------------------------------------------------------------------
    Defined benefit pension
     plan - Harry Winston
     retail segment           $      403  $        6  $      814  $       12
    Defined contribution
     plan - Harry Winston
     retail segment                  235         390         469         600
    Defined contribution plan
     - Diavik Diamond Mine           285         238         497         401
    -------------------------------------------------------------------------
                              $      923  $      634  $    1,780  $    1,013
                              -----------------------------------------------
                              -----------------------------------------------

    NOTE 11:

    Related Parties

    Transactions with related parties for the six months ended July 31, 2008
    include $0.7 million payable of rent ($0.9 million for the six months
    ended July 31, 2007) relating to the New York salon, payable to a Harry
    Winston Inc. employee.

    NOTE 12:

    Capital Management

    The Company's capital includes cash and cash equivalents, short-term
    debt, long-term debt and equity, which includes issued common shares,
    contributed surplus and retained earnings.

    The Company's primary objective with respect to its capital management is
    to ensure that it has sufficient cash resources to maintain its ongoing
    operations, to provide returns to shareholders and benefits for other
    stakeholders, and to pursue growth opportunities. To meet these needs,
    the Company may from time to time raise additional funds through
    borrowing and/or the issuance of equity or debt or by securing strategic
    partners, upon approval by the Board of Directors. The Board of Directors
    reviews and approves any material transactions out of the ordinary course
    of business, including proposals on acquisitions or other major
    investments or divestitures, as well as annual capital and operating
    budgets.

    The Company is subject to externally imposed capital requirements related
    to its senior secured term and revolving credit facilities, whereby it is
    required to maintain a consolidated tangible net worth in excess of
    $250 million. There has been no change with respect to the Company's
    overall capital risk management strategy. At July 31, 2008, the Company
    is in compliance with this covenant.

    NOTE 13:

    Financial Instruments

    The Company has various financial instruments comprised of cash and cash
    equivalents, cash collateral and cash reserves, accounts receivable,
    accounts payable and accrued liabilities, bank advances and long-term
    debt.

    Cash and cash equivalents consist of cash on hand and balances with banks
    and short-term investments held in overnight deposits with a maturity on
    acquisition of less than 90 days. Cash and cash equivalents are
    designated as held-for-trading and are carried at fair value.

    The fair value of accounts receivable is determined by the amount of cash
    anticipated to be received in the normal course of business from the
    financial asset.

    The carrying values of these financial instruments are as follows:

                                 July 31, 2008           January 31, 2008

                            Estimated     Carrying    Estimated     Carrying
                           Fair Value        Value   Fair Value        Value
    -------------------------------------------------------------------------
    Financial Assets:
      Cash and cash
       equivalents        $    56,318  $    56,318  $    49,628  $    49,628
      Cash collateral
       and cash reserves       25,303       25,303       25,615       25,615
      Accounts receivable      30,152       30,152       25,505       25,505
    -------------------------------------------------------------------------
                          $   111,773  $   111,773  $   100,748  $   100,748
                          ---------------------------------------------------
                          ---------------------------------------------------
    Financial Liabilities:
      Accounts payable
       and accrued
       liabilities        $   137,069  $   137,069  $   124,426  $   124,426
      Bank advances            43,742       43,742       34,928       34,928
      Long-term debt          294,524      294,524      309,349      309,349
    -------------------------------------------------------------------------
                          $   475,335  $   475,335  $   468,703  $   468,703
                          ---------------------------------------------------
                          ---------------------------------------------------

    NOTE 14:

    Financial Risk Exposure and Risk Management

    The Company is exposed, in varying degrees, to a variety of financial
    instrument related risks by virtue of its activities. The Company's
    overall financial risk management program focuses on the preservation of
    capital and protecting current and future Company assets and cash flows
    by minimizing exposure to risks posed by the uncertainties and
    volatilities of financial markets.

    The Company's Audit Committee has responsibility to review and discuss
    significant financial risks or exposures and to assess the steps
    management has taken to monitor, control, report and mitigate such risks
    to the Company.

    Financial risk management is carried out by the Finance department, which
    identifies and evaluates financial risks and establishes controls and
    procedures to ensure financial risks are mitigated.

    The types of risk exposure and the way in which such exposures are
    managed are as follows:

    i) Currency Risk

    The Company's sales are predominately denominated in US dollars. As the
    Company operates in an international environment, some of the Company's
    financial instruments and transactions are denominated in currencies
    other than the US dollar. The results of the Company's operations are
    subject to currency transaction risk and currency translation risk. The
    operating results and financial position of the Company are reported in
    US dollars in the Company's consolidated financial statements.

    The Company's primary foreign exchange exposure impacting pre-tax
    earnings arises from the following sources:

        Net Canadian dollar denominated monetary assets and liabilities. The
        most significant exposure relates to its Canadian dollar future
        income tax liability. The Company's functional and reporting currency
        is US dollars; however, the calculation of income tax expense is
        based on income in the currency of the country of origin. As such,
        the Company is continually subject to foreign exchange fluctuations,
        particularly as the Canadian dollar moves against the US dollar. The
        weakening/strengthening of the Canadian dollar versus the US dollar
        results in an unrealized foreign exchange gain/loss on the
        revaluation of the Canadian dollar denominated future income tax
        liability.

        Committed or anticipated foreign currency denominated transactions,
        primarily Canadian dollar costs at the Diavik Diamond Mine.

    Based on the Company's net exposure to Canadian dollar monetary assets
    and liabilities at July 31, 2008, a one-cent change in the exchange rate
    would have impacted pre-tax net earnings for the quarter by $2.9 million.

    ii)  Interest Rate Risk

         Interest rate risk is the risk borne by an interest-bearing asset or
         liability as a result of fluctuations in interest rates.

         Financial assets and financial liabilities with variable interest
         rates expose the Company to cash flow interest rate risk. The
         Company's most significant interest rate risk arises from its
         various credit facilities which bear variable interest based on
         LIBOR.

    iii) Concentration of Credit Risk

         Credit risk is the risk of a financial loss to the Company if a
         customer or counterparty to a financial instrument fails to meet its
         contractual obligation.

         Financial instruments that potentially subject the company to credit
         risk consist of trade receivables from retail segment clients. While
         economic factors can affect credit risk, the Company manages risk by
         providing credit terms on a case-by-case basis only after a review
         of the client's financial position and past credit history. The
         Company has not experienced significant losses in the past from its
         customers.

         The Company's exposure to credit risk in the mining segment is
         minimized by its sales policy, which requires receipt of cash prior
         to the delivery of rough diamonds to its customers.

         The Company manages credit risk, in respect of short-term
         investments, by maintaining bank accounts with Tier 1 banks and
         investing only in term deposits or banker's acceptances with highly
         rated financial institutions that are capable of prompt liquidation.
         The Company monitors and manages its concentration of counterparty
         credit risk on an ongoing basis.

         At July 31, 2008, the Company's maximum counterparty credit exposure
         consists of the carrying amount of cash and cash equivalents and
         accounts receivable, which approximates fair value.

    iv)  Liquidity Risk

         Liquidity risk is the risk that the Company will not be able to meet
         its financial obligations as they fall due.

         The Company manages its liquidity by ensuring that there is
         sufficient capital to meet short and long-term business
         requirements, after taking into account cash flows from operations
         and the Company's holdings of cash and cash equivalents. The Company
         also strives to maintain sufficient financial liquidity at all times
         in order to participate in investment opportunities as they arise,
         as well as to withstand sudden adverse changes in economic
         circumstances. Management forecasts cash flows for its current and
         subsequent fiscal years to predict future financing requirements.
         Future requirements are met through a combination of committed
         credit facilities and access to capital markets.

         At July 31, 2008, the Company had $56.3 million of cash and cash
         equivalents and $41.7 million available under credit facilities.

         The following table summarizes the aggregate amount of contractual
         future cash outflows for the Company's financial liabilities:


    (expressed in
     thousands of United             Less than      Year      Year     After
     States dollars)           Total    1 year       2-3       4-5   5 years
    -------------------------------------------------------------------------
    Accounts payable and
     accrued liabilities    $137,069  $137,069  $      -  $      -  $      -
    Income taxes payable      54,013    54,013         -         -         -
    Bank advances             43,742    43,742         -         -         -
    Long-term debt(a)        356,974    82,810    63,278    20,807   190,079
    Environmental and
     participation
     agreements
     incremental
     commitments              95,445    74,994     3,906     1,953    14,592
    Operating lease
     obligations             119,637    17,267    28,325    18,185    55,860
    Capital lease
     obligations               1,984       921     1,063         -         -
    -------------------------------------------------------------------------
    (a) Includes projected interest payments on the current debt outstanding
        based on interest rates in effect at July 31, 2008.


    NOTE 15:

    Insurance Claim

    Included in cost of sales for the mining segment is a $4.3 million
    insurance settlement relating to an excavator fire that occurred in the
    fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The settlement
    represents the recovery of the cost of the excavator that was previously
    written off along with incremental operating expenses relating to the
    procurement of a replacement excavator. Total proceeds of $5.0 million
    from the insurance settlement are expected to be received in the third
    quarter, resulting in a gain of approximately $0.7 million.

    NOTE 16:

    Segmented Information

    The Company operates in two segments within the diamond industry, mining
    and retail, for the three months ended July 31, 2008.

    The mining segment consists of the Company's rough diamond business. This
    business includes the 40% interest in the Diavik group of mineral claims
    and the sale of rough diamonds in the market-place.

    The retail segment consists of the Company's ownership in Harry Winston
    Inc. This segment consists of the marketing of fine jewelry and watches
    on a worldwide basis.

    For the three months ended
     July 31, 2008                        Mining        Retail         Total
    -------------------------------------------------------------------------
    Sales
      Canada                        $    105,014  $          -  $    105,014
      United States                            -        28,984        28,984
      Europe                                   -        31,636        31,636
      Asia                                     -        20,485        20,485
    Cost of sales                         32,390        41,152        73,542
    -------------------------------------------------------------------------
    Gross margin                          72,624        39,953       112,577
    Gross margin (%)                       69.2%         49.3%         60.5%
    Selling, general and
     administrative expenses               5,151        34,043        39,194
    -------------------------------------------------------------------------
    Earnings from operations              67,473         5,910        73,383
    -------------------------------------------------------------------------
    Interest and financing expenses       (2,648)       (2,718)       (5,366)
    Other income (expense)                   816            (1)          815
    Foreign exchange gain                  5,187           114         5,301
    -------------------------------------------------------------------------
    Segmented earnings before
     income taxes                   $     70,828  $      3,305  $     74,133
                                    -----------------------------------------
                                    -----------------------------------------
    Segmented assets as at
     July 31, 2008
      Canada                        $    969,164  $          -  $    969,164
      United States                            -       464,792       464,792
      Other foreign countries             35,200       167,361       202,561
    -------------------------------------------------------------------------
                                    $  1,004,364  $    632,153  $  1,636,517
    -------------------------------------------------------------------------
    Goodwill as at July 31, 2008    $          -  $     93,780  $     93,780
    Capital expenditures            $     63,284  $      4,413  $     67,697
    Other significant non-cash
     items:
      Income tax recovery - Future  $     (3,111) $       (293) $     (3,404)
      Amortization and accretion    $     13,689  $      3,089  $     16,778
    -------------------------------------------------------------------------

    Sales to one customer in the mining segment totalled $6.7 million for the
    three months ended July 31, 2008 ($8.1 million for the three months ended
    July 31, 2007).


    For the three months ended
     July 31, 2007                        Mining        Retail         Total
    -------------------------------------------------------------------------
    Sales
      Canada                        $    105,071  $          -  $    105,071
      United States                            -        22,162        22,162
      Europe                                   -        21,248        21,248
      Asia                                     -        24,788        24,788
    Cost of sales                         46,217        35,610        81,827
    -------------------------------------------------------------------------
    Gross margin                          58,854        32,588        91,442
    Gross margin (%)                       56.0%         47.8%         52.8%
    Selling, general and
     administrative expenses               5,861        29,340        35,201
    -------------------------------------------------------------------------
    Earnings from operations              52,993         3,248        56,241
    -------------------------------------------------------------------------
    Interest and financing expenses       (3,982)       (3,240)       (7,222)
    Other income                             356           189           545
    Foreign exchange gain (loss)         (11,985)          200       (11,785)
    -------------------------------------------------------------------------
    Segmented earnings before
     income taxes                   $     37,382  $        397  $     37,779
                                    -----------------------------------------
                                    -----------------------------------------
    Segmented assets as at
     July 31, 2007
      Canada                        $    761,976  $          -  $    761,976
      United States                            -       470,233       470,233
      Other foreign countries              8,284       126,773       135,057
    -------------------------------------------------------------------------
                                    $    770,260  $    597,006  $  1,367,266
    -------------------------------------------------------------------------
    Goodwill as at July 31, 2007    $          -  $     96,575  $     96,575
    Capital expenditures            $     39,761  $      8,556  $     48,317
    Other significant non-cash
     items:
      Income tax recovery - Future  $     (7,122) $       (222) $     (7,344)
      Amortization and accretion    $     17,969  $      2,086  $     20,054
    -------------------------------------------------------------------------


    For the six months ended
     July 31, 2008                        Mining        Retail         Total
    -------------------------------------------------------------------------
    Sales
      Canada                        $    186,407  $          -  $    186,407
      United States                            -        53,910        53,910
      Europe                                   -        63,266        63,266
      Asia                                     -        38,615        38,615
    Cost of sales                         64,540        82,151       146,691
    -------------------------------------------------------------------------
    Gross margin                         121,867        73,640       195,507
    Gross margin (%)                       65.4%         47.3%         57.1%
    Selling, general and
     administrative expenses              12,359        70,120        82,479
    -------------------------------------------------------------------------
    Earnings from operations             109,508         3,520       113,028
    -------------------------------------------------------------------------
    Interest and financing expenses       (5,127)       (5,692)      (10,819)
    Other income (expense)                 1,448          (387)        1,061
    Foreign exchange gain                  5,261           195         5,456
    -------------------------------------------------------------------------
    Segmented earnings (loss)
     before income taxes            $    111,090  $     (2,364) $    108,726
                                    -----------------------------------------
                                    -----------------------------------------
    Segmented assets as at
     July 31, 2008
      Canada                        $    969,164  $          -  $    969,164
      United States                            -       464,792       464,792
      Other foreign countries             35,200       167,361       202,561
    -------------------------------------------------------------------------
                                    $  1,004,364  $    632,153  $  1,636,517
    -------------------------------------------------------------------------
    Goodwill as at July 31, 2008    $          -  $     93,780  $     93,780
    Capital expenditures            $    129,908  $      7,656  $    137,564
    Other significant non-cash
     items:
      Income tax recovery - Future  $     (9,739) $     (1,829) $    (11,568)
      Amortization and accretion    $     24,428  $      6,305  $     30,733
    -------------------------------------------------------------------------

    Sales to one customer in the mining segment totalled $10.3 million for
    the six months ended July 31, 2008 ($12.7 million for the six months
    ended July 31, 2007).


    For the six months ended
     July 31, 2007                        Mining        Retail         Total
    -------------------------------------------------------------------------
    Sales
      Canada                        $    187,823  $          -  $    187,823
      United States                            -        46,503        46,503
      Europe                                   -        43,595        43,595
      Asia                                     -        36,713        36,713
    Cost of sales                         86,733        66,226       152,959
    -------------------------------------------------------------------------
    Gross margin                         101,090        60,585       161,675
    Gross margin (%)                       53.8%         47.8%         51.4%
    Selling, general and
     administrative expenses              10,948        58,464        69,412
    -------------------------------------------------------------------------
    Earnings from operations              90,142         2,121        92,263
    -------------------------------------------------------------------------
    Interest and financing expenses       (7,657)       (5,697)      (13,354)
    Other income                           1,122           336         1,458
    Foreign exchange gain (loss)         (25,296)          219       (25,077)
    -------------------------------------------------------------------------
    Segmented earnings (loss)
     before income taxes            $     58,311  $     (3,021) $     55,290
                                    -----------------------------------------
                                    -----------------------------------------
    Segmented assets as at
     July 31, 2007
      Canada                        $    761,976  $          -  $    761,976
      United States                            -       470,233       470,233
      Other foreign countries              8,284       126,773       135,057
    -------------------------------------------------------------------------
                                    $    770,260  $    597,006  $  1,367,266
    -------------------------------------------------------------------------
    Goodwill as at July 31, 2007    $          -  $     96,575  $     96,575
    Capital expenditures            $     72,630  $     17,034  $     89,664
    Other significant non-cash
     items:
      Income tax recovery - Future  $     (9,805) $       (861) $    (10,666)
      Amortization and accretion    $     35,659  $      3,998  $     39,657
    -------------------------------------------------------------------------
    

    %SEDAR: 00003786E




For further information:

For further information: Kelley Stamm, kstamm@harrywinston.com, (416)
362-2237 ext.223

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Dominion Diamond Corporation

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