Harry Winston Diamond Corporation Announces Second Quarter Fiscal 2010 Results



    TORONTO, Sept. 10 /CNW/ - Harry Winston Diamond Corporation (TSX: HW,
NYSE:   HWD) (the "Company") today reported second quarter results for the
period ended July 31, 2009. The Company recorded a consolidated net loss of
$24.5 million or $0.32 per share for the quarter, compared to net earnings of
$49.9 million or $0.81 per share in the second quarter of the prior year. The
consolidated net loss for the quarter was significantly impacted by a net
foreign exchange loss primarily on future income tax liabilities of $25.3
million or $0.33 per share, compared to a net foreign exchange gain of $5.3
million or $0.09 per share in the comparable quarter of the prior year.
    Robert Gannicott, Chairman and Chief Executive Officer commented: "During
this quarter the diamond industry as a whole adjusted production to the
curtailed demand in the intermediate part of the diamond pipeline due to the
world economic conditions. Rough diamond prices increased substantially during
the quarter with our own pricing ending at 50% above the low point in the
first quarter. This improving trend has continued into the third quarter.
Although retail sales remained below profitable levels, we have seen a 9%
increase in transactions worldwide compared to the prior quarter led by
increases in the Far East, including Japan. Sales have also edged up month to
month during the quarter suggesting a shift in momentum."
    Consolidated sales were $94.8 million for the quarter compared to $186.1
million for the comparable quarter of the prior year, resulting in a 75%
decrease in gross margin and a loss from operations of $3.9 million.
    The mining segment recorded sales of $46.0 million, a 56% decrease from
$105.0 million in the comparable quarter of the prior year. The decrease in
sales resulted from a combination of a 36% decrease in rough diamond prices
and a 31% decrease in volume of carats sold in the second quarter. Rough
diamond production for the calendar quarter was 0.6 million carats,
significantly lower than the comparable quarter of the prior year due to a
planned decrease in ore production reflecting the softness in the rough
diamond market. Earnings from operations for the quarter were $1.7 million
compared to $67.5 million for the comparable quarter of the prior year.
    The retail segment recorded a 40% decrease in sales to $48.8 million,
with a loss from operations of $5.6 million compared to earnings from
operations of $5.9 million in the second quarter of the prior year. Retail
segment selling, general and administrative expenses decreased by $5.8 million
from $34.0 million in the comparable quarter of the prior year. In addition,
selling, general and administrative expenses decreased by $2.0 million from
the first quarter of this year.

    
    Second Quarter Fiscal 2010 Financial Highlights
    (US$ in millions except Earnings per Share amounts)
    -------------------------------------------------------------------------
                                   Three       Three         Six         Six
                                  months      months      months      months
                                   ended       ended       ended       ended
                                 July 31,    July 31,    July 31,    July 31,
                                    2009        2008        2009        2008
    -------------------------------------------------------------------------
    Sales                           94.8       186.1       204.4       342.2
    -------------------------------------------------------------------------
    Earnings from operations
     (loss)                         (3.9)       73.4       (14.0)      113.0
    -------------------------------------------------------------------------
    Net earnings (loss)            (24.5)       49.9       (69.6)       71.2
    -------------------------------------------------------------------------
    Earnings (loss) per share     ($0.32)      $0.81      ($0.97)      $1.17
    -------------------------------------------------------------------------
    

    Conference Call and Webcast

    Beginning at 09:00AM (EST) on Friday, September 11, the Company will host
a conference call for analysts, investors and other interested parties.
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
800-706-7741 within North America or 617-614-3471 from international locations
and entering passcode 18664077.
    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 starting at noon through
12:00AM (EST), Friday, September 18, 2009, by dialing 888-286-8010 within
North America or 617-801-6888 from international locations and entering
passcode 41485369.

    About Harry Winston Diamond Corporation

    Harry Winston Diamond Corporation is a specialist diamond enterprise with
assets in the mining and retail segments of the diamond industry. Harry
Winston supplies rough diamonds to the global market from its 40 percent
ownership interest in the Diavik Diamond Mine (economic ownership of 31%).
    The Company's retail division is a premier diamond jeweler and luxury
timepiece retailer with salons in key locations, including New York, Paris,
London, Beijing, Tokyo, and Beverly Hills.
    The Company focuses on the two most profitable segments of the diamond
industry, mining and retail, in which its expertise creates shareholder value.
This unique business model provides key competitive advantages; rough diamond
sales and polished diamond purchases provide market intelligence that enhances
the Company's overall performance.
    For more information, please visit www.harrywinston.com.

    
                         2010 Second Quarter Report
                       HARRY WINSTON DIAMOND COPORATION
                       Six Months Ended July 31, 2009


                                 Highlights

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

    Harry Winston Diamond Corporation recorded a consolidated net loss of
$24.5 million or $0.32 per share for the quarter, compared to net earnings of
$49.9 million or $0.81 per share in the second quarter of the prior year. The
consolidated net loss for the quarter was significantly impacted by a net
foreign exchange loss primarily on future income tax liabilities of $25.3
million or $0.33 per share, compared to a net foreign exchange gain of $5.3
million or $0.09 per share in the comparable quarter of the prior year.
    Consolidated sales were $94.8 million for the quarter compared to $186.1
million for the comparable quarter of the prior year, resulting in a 75%
decrease in gross margin and a loss from operations of $3.9 million.
    The mining segment recorded sales of $46.0 million, a 56% decrease from
$105.0 million in the comparable quarter of the prior year. The decrease in
sales resulted from a combination of a 36% decrease in rough diamond prices
and a 31% decrease in volume of carats sold in the second quarter. Rough
diamond production for the calendar quarter was 0.6 million carats,
significantly lower than the comparable quarter of the prior year due to a
planned decrease in ore production reflecting the softness in the rough
diamond market. Earnings from operations for the quarter were $1.7 million
compared to $67.5 million for the comparable quarter of the prior year.
    The retail segment recorded a 40% decrease in sales to $48.8 million,
with a loss from operations of $5.6 million compared to earnings from
operations of $5.9 million in the second quarter of the prior year. Retail
segment selling, general and administrative expenses decreased by $5.8 million
from $34.0 million in the comparable quarter of the prior year. In addition,
selling, general and administrative expenses decreased by $2.0 million from
the first quarter of this fiscal year.

    
                     Management's Discussion and Analysis

                       Prepared as of September 9, 2009
    (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 ("Harry Winston
Diamond Corporation", or the "Company") for the three and six months ended
July 31, 2009 and its financial position as at July 31, 2009. 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, 2009 and the audited consolidated financial statements of the Company and
notes thereto for the year ended January 31, 2009. 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, 2009 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, 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 and the demand for luxury goods, expected cost of sales and
gross margin trends in the mining segment, and expected sales trends in the
retail segment. Actual results may vary from the forward-looking information.
See "Risks and Uncertainties" on page 18 for material risk factors that could
cause actual results to differ materially from the forward-looking
information.
    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, world and US economic
conditions and the worldwide demand for luxury goods. Specifically, 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 and demand for luxury goods. While the Company 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, cash flow and liquidity risks 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 the Company'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. The Company uses forward-looking statements because it believes
such statements provide useful information with respect to the expected future
operations and financial performance of the Company, and cautions readers that
the information may not be appropriate for other purposes. While the Company
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 Company'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 (economic interest
of 31%), 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 operating under the Harry Winston(R) brand.
    The Company's most significant asset is an ownership 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 Limited Partnership ("HWDLP") (40%)
where HWDLP holds an undivided 40% ownership interest in the assets,
liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of
the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife,
Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.
As a result of the strategic investment by Kinross Gold Corporation
("Kinross") of Toronto, Canada, described below, HWDLP is 77.5% owned by the
Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is reported in
the consolidated financial statements as part of non-controlling interest.
    On March 31, 2009, Kinross made a net investment of $150.0 million to
acquire an indirect interest in the Diavik Diamond Mine and a direct equity
stake in the Company. Kinross subscribed for 15.2 million of the Company's
treasury shares at a price of $3.00 per share, being approximately 19.9% of
the Company's issued equity post the transaction. Kinross also subscribed for
new partnership units representing a 22.5% interest in HWDLP, for a net
effective subscription value of $103.7 million. With the closing of the
Kinross transaction, the Company's economic interest in the Diavik Diamond
Mine is 31%.

    
    Market Commentary

    The Diamond Market
    
    The rough diamond market continued to build on the momentum that was
evident at the end of the first quarter. Rough diamond prices increased
substantially during the quarter with our own pricing ending at 50% above the
low point in the first quarter. Polished diamond demand continued to be
resilient in the Far East and a cautious but definite return of interest from
US buyers has helped to revive the industry. Diamond polishers have been eager
to purchase rough diamonds, which are still restricted in supply, leading to
firmer prices in the quarter. Although it is anticipated that the improved
market conditions will encourage some diamond producers to sell accumulated
inventory, the increased supply is not expected to dampen rough diamond
prices.
    In the polished diamond market, the hiatus in both mining and diamond
polishing has led to shortages in certain high-quality ranges. As the market
heads into the busy holiday season, the shortages are anticipated to lead to
further upward price movement.

    The Retail Jewelry Market

    Trading conditions in the luxury segment of the diamond jewelry market
remain challenging. However, the Asian market is showing signs of recovery
while the US and European markets appear to have reached bottom. Many industry
peers are anticipating fourth quarter sales to improve over last year's
disappointing holiday season.

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

    Consolidated Financial Results

    The following is a summary of the Company's consolidated quarterly
results for the eight quarters ended July 31, 2009 following the basis of
presentation utilized in its Canadian GAAP financial statements:

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

    -------------------------------------------------------------------------
                                2010      2010      2009      2009      2009
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $ 94,776  $109,643  $118,399  $148,623  $186,119
    Cost of sales             66,294    83,944    68,908    71,679    73,542
    -------------------------------------------------------------------------
    Gross margin              28,482    25,699    49,491    76,944   112,577
    Gross margin (%)           30.1%     23.4%     41.8%     51.8%     60.5%
    Selling, general and
     administrative
     expenses                 32,380    35,749    39,399    33,998    39,194
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations               (3,898)  (10,050)   10,092    42,946    73,383
    -------------------------------------------------------------------------
    Interest and financing
     expenses                 (2,998)   (3,699)   (4,960)   (4,678)   (5,366)
    Other income                  83       281       778       407       815
    Insurance settlement           -     3,250    17,240         -         -
    Dilution loss               (539)  (34,222)        -         -         -
    Impairment charge              -         -   (93,780)        -         -
    Foreign exchange gain
     (loss)                  (25,274)   (5,839)    4,649    48,982     5,301
    -------------------------------------------------------------------------
    Earnings (loss) before
     income taxes            (32,626)  (50,279)  (65,981)   87,657    74,133
    Income taxes (recovery)   (5,662)   (3,120)    7,052    15,685    24,185
    -------------------------------------------------------------------------
    Earnings (loss) before
     non-controlling
     interest                (26,964)  (47,159)  (73,033)   71,972    49,948
    Non-controlling
     interest                 (2,443)   (2,075)      (58)       81         1
    -------------------------------------------------------------------------
    Net earnings (loss)     $(24,521) $(45,084) $(72,975) $ 71,891  $ 49,947
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss)
     per share              $  (0.32) $  (0.68) $  (1.19) $   1.17  $   0.81
    Diluted earnings
     (loss) per share       $  (0.32) $  (0.68) $  (1.19) $   1.17  $   0.81
    Cash dividends declared
     per share              $   0.00  $   0.00  $   0.05  $   0.05  $   0.05
    Total assets(i)         $  1,533  $  1,592  $  1,567  $  1,645  $  1,637
    Total long-term
     liabilities(i)         $    507  $    496  $    550  $    562  $    617
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                               Six       Six
                                                            months    months
                                                             ended     ended
                                2009      2008      2008   July 31,  July 31,
                                  Q1        Q4        Q3      2009      2008
    -------------------------------------------------------------------------
    Sales                   $156,079  $188,195  $176,478  $204,419  $342,198
    Cost of sales             73,149    83,637    74,591   150,238   146,691
    -------------------------------------------------------------------------
    Gross margin              82,930   104,558   101,887    54,181   195,507
    Gross margin (%)           53.1%     55.6%     57.7%     26.5%     57.1%
    Selling, general and
     administrative
     expenses                 43,285    45,494    35,539    68,129    82,479
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations               39,645    59,064    66,348   (13,948)  113,028
    -------------------------------------------------------------------------
    Interest and financing
     expenses                 (5,453)   (7,082)   (7,422)   (6,697)  (10,819)
    Other income                 246       706       594       364     1,061
    Insurance settlement           -    13,488         -     3,250         -
    Dilution loss                  -         -         -   (34,761)        -
    Impairment charge              -         -         -         -         -
    Foreign exchange gain
     (loss)                      155    22,270   (40,584)  (31,113)    5,456
    -------------------------------------------------------------------------
    Earnings (loss) before
     income taxes             34,593    88,446    18,936   (82,905)  108,726
    Income taxes (recovery)   13,336    (1,968)   26,197    (8,782)   37,521
    -------------------------------------------------------------------------
    Earnings (loss) before
     non-controlling
     interest                 21,257    90,414    (7,261)  (74,123)   71,205
    Non-controlling
     interest                      1       (34)       90    (4,518)        2
    -------------------------------------------------------------------------
    Net earnings (loss)     $ 21,256  $ 90,448  $ (7,351) $(69,605) $ 71,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss)
     per share              $   0.35  $   1.55  $  (0.13) $  (0.97) $   1.17
    Diluted earnings
     (loss) per share       $   0.35  $   1.54  $  (0.13) $  (0.97) $   1.17
    Cash dividends declared
     per share              $   0.05  $   0.05  $   0.25  $   0.00  $   0.10
    Total assets(i)         $  1,591  $  1,494  $  1,433  $  1,533  $  1,637
    Total long-term
     liabilities(i)         $    634  $    660  $    530  $    507  $    617
    -------------------------------------------------------------------------

    (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 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 9 for
        additional information.


    Three Months Ended July 31, 2009 Compared to Three Months Ended July 31,
    2008
    

    CONSOLIDATED NET EARNINGS

    The Company recorded a second quarter consolidated net loss of $24.5
million or $0.32 per share compared to net earnings of $49.9 million or $0.81
per share in the second quarter of the prior year. Consolidated net loss for
the quarter included a net foreign exchange loss primarily on future income
tax liabilities of $25.3 million or $0.33 per share, compared to a net foreign
exchange gain of $5.3 million or $0.09 per share in the comparable quarter of
the prior year.

    CONSOLIDATED SALES

    Sales for the second quarter totalled $94.8 million, consisting of rough
diamond sales of $46.0 million and retail segment sales of $48.8 million. This
compares to sales of $186.1 million in the comparable quarter of the prior
year (rough diamond sales of $105.0 million and retail segment sales of $81.1
million). The Company held two primary rough diamond sales in the second
quarter, consistent with the prior year. See "Segmented Analysis" on page 9
for additional information.

    CONSOLIDATED COST OF SALES AND GROSS MARGIN

    The Company's second quarter cost of sales was $66.3 million for a gross
margin of 30.1% compared to $73.5 million cost of sales and gross margin of
60.5% for the comparable quarter of the prior year. The Company's cost of
sales includes costs associated with mining, rough diamond sorting and retail
sales activities. See "Segmented Analysis" on page 9 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
$32.4 million for the second quarter, compared to $39.2 million in the
comparable quarter of the prior year.
    Included in SG&A expenses for the second quarter are $4.2 million for the
mining segment compared to $5.2 million for the comparable quarter of the
prior year and $28.2 million for the retail segment compared to $34.0 million
for the comparable quarter of the prior year. For the mining segment, the
decrease was primarily due to a reduction in discretionary spending. For the
retail segment, the decrease was due to a combination of an adjustment to
incentive based compensation and reduced advertising and selling expenses. See
"Segmented Analysis" on page 9 for additional information.

    CONSOLIDATED INCOME TAXES

    The Company recorded a net income tax recovery of $5.7 million during the
second quarter, compared to a net income tax expense of $24.2 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 9%, which is
based on a statutory income tax rate of 30% adjusted for various items
including Northwest Territories mining royalty, impact of foreign exchange,
earnings subject to tax different than the statutory rate, impact of income
allocated to non-controlling interest and impact of dilution loss.
    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. During the second quarter, the Canadian dollar strengthened against
the US dollar. As a result, the Company recorded an unrealized foreign
exchange loss of $19.0 million on the revaluation of the Company's Canadian
dollar denominated future income tax liability. This compares to an unrealized
foreign exchange gain of $4.4 million in the comparable quarter of the prior
year. The unrealized foreign exchange loss is not deductible 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 2029.
    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,
                                                           2009         2008
    -------------------------------------------------------------------------
    Statutory income tax rate                              30 %         31 %
    Northwest Territories mining royalty (net of
     income tax relief)                                    (1)%          8 %
    Impact of foreign exchange                            (15)%         (4)%
    Earnings subject to tax different than statutory
     rate                                                   8 %         (4)%
    Changes in valuation allowance                          - %          1 %
    Impact of dilution loss                                (1)%          - %
    Impact of income allocated to non-controlling
     interest                                              (2)%          - %
    Assessments and adjustments                            (2)%          - %
    Other items                                             - %          1 %
    Effective income tax rate                              17 %         33 %
    -------------------------------------------------------------------------
    

    CONSOLIDATED INTEREST AND FINANCING EXPENSES

    Interest and financing expenses of $3.0 million were incurred during the
second quarter compared to $5.4 million during the comparable quarter of the
prior year. The Company repaid the full amount of $74.2 million of the mining
segment's senior secured term and revolving credit facilities with the March
31, 2009 closing of the Kinross transaction.

    CONSOLIDATED OTHER INCOME

    Other income of $0.1 million was recorded during the quarter compared to
$0.8 million in the comparable quarter of the prior year.

    CONSOLIDATED DILUTION LOSS

    The Company recorded a further non-cash dilution loss of $0.5 million as
a result of a final working capital adjustment to the subscription price for
the investment by Kinross in HWDLP, which holds the Company's 40% interest in
the Diavik Diamond Mine.

    CONSOLIDATED FOREIGN EXCHANGE LOSS

    A net foreign exchange loss of $25.3 million was recognized during the
quarter compared to a net foreign exchange gain of $5.3 million in the
comparable quarter of the prior year. The loss relates principally to the
revaluation of the Company's Canadian dollar denominated long-term future
income tax liability as a result of the strengthening of the Canadian dollar
against the US dollar at July 31, 2009. 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, 2009 Compared to Six Months Ended July 31, 2008

    CONSOLIDATED NET EARNINGS
    
    The Company recorded a consolidated net loss for the six months ended
July 31, 2009 of $69.6 million or $0.97 per share compared to net earnings of
$71.2 million or $1.17 per share for the six months ended July 31, 2008.
Consolidated net loss for the six months ended July 31, 2009 included a
non-cash dilution loss of $34.8 million or $0.49 per share as a result of the
investment by Kinross Gold Corporation in HWDLP, which holds the Company's 40%
interest in the Diavik Diamond Mine. The consolidated net loss also includes a
net foreign exchange loss primarily on future income tax liabilities of $31.1
million or $0.44 per share, compared to a net foreign exchange gain of $5.5
million or $0.09 per share in the comparable period of the prior year.

    CONSOLIDATED SALES

    Sales for the six months ended July 31, 2009 totalled $204.4 million,
consisting of rough diamond sales of $103.6 million and retail segment sales
of $100.8 million. This compares to sales of $342.2 million for the six months
ended July 31, 2008 (rough diamond sales of $186.4 million and retail segment
sales of $155.8 million). See "Segmented Analysis" on page 9 for additional
information.

    CONSOLIDATED COST OF SALES AND GROSS MARGIN

    The Company's cost of sales for the six months ended July 31, 2009 was
$150.2 million for a gross margin of 26.5% compared to $146.7 million cost of
sales and gross margin of 57.1% for the comparable period of the prior year.
The Company's cost of sales includes costs associated with mining, rough
diamond sorting and retail sales activities. See "Segmented Analysis" on page
9 for additional information.

    CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    The Company incurred SG&A expenses of $68.1 million for the six months
ended July 31, 2009, compared to $82.5 million for the six months ended July
31, 2008.
    Included in SG&A expenses for the six months ended July 31, 2009 are $9.7
million for the mining segment compared to $12.4 million for the comparable
period of the prior year and $58.4 million for the retail segment compared to
$70.1 million for the comparable period of the prior year. For the mining
segment, the decrease was primarily due to reduced incentive based
compensation and a reduction in discretionary spending. For the retail
segment, the decrease was due to a combination of an adjustment to incentive
based compensation and reduced advertising and selling expenses. See
"Segmented Analysis" on page 9 for additional information.

    CONSOLIDATED INCOME TAXES

    The Company recorded a net income tax recovery of $8.8 million during the
six months ended July 31, 2009, compared to a net income tax expense of $37.5
million in the comparable period of the prior year. The Company's effective
income tax rate for the six months ended July 31, 2009, excluding Harry
Winston's retail segment, is 6%, which is based on a statutory income tax rate
of 30% adjusted for various items including Northwest Territories mining
royalty, impact of foreign exchange, earnings subject to tax different than
the statutory rate, impact of income allocated to non-controlling interest and
impact of dilution loss.
    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. During the six months ended July 31, 2009, the Canadian dollar
strengthened against the US dollar. As a result, the Company recorded an
unrealized foreign exchange loss of $23.0 million on the revaluation of the
Company's Canadian dollar denominated future income tax liability. This
compares to an unrealized foreign exchange gain of $5.3 million in the
comparable period of the prior year. The unrealized foreign exchange loss is
not deductible for Canadian income tax purposes.
    During the six months ended July 31, 2009, the Company recorded a
non-cash dilution loss of $34.8 million as a result of the investment by
Kinross in HWDLP, which holds the Company's 40% interest in the Diavik Diamond
Mine. The dilution loss is not deductible for Canadian tax purposes and hence
no tax recovery was recorded against the dilution loss. In addition, a certain
portion of the Company's earnings and loss before income taxes is allocated to
Kinross as a result of its investment of an indirect interest in the Diavik
Diamond Mine. As a result, the tax impact of the income allocated to
non-controlling interest is recorded as a reconciling item in the tax rate
reconciliation.
    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 2029.
    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,
                                                           2009         2008
    -------------------------------------------------------------------------
    Statutory income tax rate                              30 %         31 %
    Northwest Territories mining royalty (net of
     income tax relief)                                     - %         10 %
    Impact of foreign exchange                             (6)%         (4)%
    Earnings subject to tax different than
     statutory rate                                         4 %         (4)%
    Changes in valuation allowance                         (1)%          1 %
    Impact of dilution loss                               (13)%          - %
    Impact of income allocated to non-controlling
     interest                                              (2)%          - %
    Assessments and adjustments                            (1)%          1 %
    Effective income tax rate                              11 %         35 %
    -------------------------------------------------------------------------
    

    CONSOLIDATED INTEREST AND FINANCING EXPENSES

    Interest and financing expenses of $6.7 million were incurred during the
six months ended July 31, 2009 compared to $10.8 million during the comparable
period of the prior year. The Company repaid the full amount of $74.2 million
of the mining segment's senior secured term and revolving credit facilities
with the March 31, 2009 closing of the Kinross transaction.

    CONSOLIDATED OTHER INCOME

    Other income of $0.4 million was recorded during the six months ended
July 31, 2009 compared to $1.1 million in the comparable period of the prior
year.

    CONSOLIDATED INSURANCE SETTLEMENT

    The Company received the remaining insurance settlement of $3.3 million
related to the December 2008 robbery at the Harry Winston Paris salon during
the six months ended July 31, 2009.

    CONSOLIDATED DILUTION LOSS

    During the six months ended July 31, 2009, the Company recorded a
non-cash dilution loss of $34.8 million as a result of the investment by
Kinross in HWDLP, which holds the Company's 40% interest in the Diavik Diamond
Mine.

    CONSOLIDATED FOREIGN EXCHANGE LOSS

    A net foreign exchange loss of $31.1 million was recognized during the
six months ended July 31, 2009 compared to a net foreign exchange gain of $5.5
million in the comparable period of the prior year. The current year to date
loss relates principally to the revaluation of the Company's Canadian dollar
denominated long-term future income tax liability as a result of the
strengthening of the Canadian dollar against the US dollar at July 31, 2009.
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)

    -------------------------------------------------------------------------
                                2010      2010      2009      2009      2009
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $ 45,941  $ 57,690  $ 51,100  $ 90,716  $105,014
    Cost of sales             40,049    57,256    34,612    40,617    32,390
    -------------------------------------------------------------------------
    Gross margin               5,892       434    16,488    50,099    72,624
    Gross margin (%)           12.8%      0.8%     32.3%     55.2%     69.2%
    Selling, general and
     administrative expenses   4,182     5,503     4,430     3,114     5,151
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations             $  1,710  $ (5,069) $ 12,058  $ 46,985  $ 67,473
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                                               Six       Six
                                                            months    months
                                                             ended     ended
                                2009      2008      2008   July 31,  July 31,
                                  Q1        Q4        Q3      2009      2008
    -------------------------------------------------------------------------
    Sales                   $ 81,393  $103,238  $122,711  $103,631  $186,407
    Cost of sales             32,150    36,962    45,985    97,305    64,540
    -------------------------------------------------------------------------
    Gross margin              49,243    66,276    76,726     6,326   121,867
    Gross margin (%)           60.5%     64.2%     62.5%      6.1%     65.4%
    Selling, general and
     administrative expenses   7,208     5,663     6,748     9,685    12,359
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations             $ 42,035  $ 60,613  $ 69,978  $ (3,359) $109,508
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Three Months Ended July 31, 2009 Compared to Three Months Ended July 31,
    2008
    

    MINING SALES

    Rough diamond sales for the quarter totalled $46.0 million compared to
$105.0 million in the comparable quarter of the prior year resulting from a
combination of a 36% decrease in rough diamond prices and a 31% decrease in
volume of carats sold. Rough diamond prices have increased over the market low
seen in the first quarter of this year but remain significantly lower than the
prices achieved in the comparable quarter of the prior year. Rough diamond
production during the quarter was significantly lower than the comparable
quarter of the prior year due to a planned decrease in ore production
reflecting the softness in the rough diamond market.
    The Company held two primary rough diamond sales in the second quarter,
consistent with 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, rough diamond prices 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 $40.0 million resulting in
a gross margin of 12.8% compared to $32.4 million cost of sales and gross
margin of 69.2% in the comparable quarter of the prior year. The increase in
cost of sales, attributable to mining costs, resulted primarily from the costs
associated with preparing the A-418 kimberlite pipe for commercial production
being capitalized in the comparable quarter of the prior year. These same
activities have been recorded as direct operating costs in the current
quarter. The mining gross margin is anticipated to fluctuate between quarters,
resulting from variations in the specific mix of product sold during each
quarter and rough diamond prices.
    A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes 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 $1.0 million from the
comparable period of the prior year primarily due to a reduction in
discretionary spending.

    
    Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008

    MINING SALES
    
    Rough diamond sales for the six months ended July 31, 2009 totalled
$103.6 million compared to $186.4 million in the comparable period of the
prior year resulting from a 49% decrease in rough diamond prices. During the
first quarter of the fiscal year, rough diamond prices were at their lowest
level since the Diavik Diamond Mine began operation. In addition, the
Company's achieved prices were particularly low in the first quarter as the
sales mix contained a significant proportion of lower value goods carried in
inventory from January 31, 2009. Rough diamond prices have increased over the
market low seen in the first quarter but remain significantly lower than the
prices achieved in the comparable period of the prior year. Rough diamond
production during the six months was significantly lower than the comparable
period of the prior year due to a planned decrease in ore production
reflecting the softness in the rough diamond market.
    The Company held four primary rough diamond sales during the six months
ended July 31, 2009, consistent with the comparable period 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, rough diamond prices 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

    For the six months ended July 31, 2009, cost of sales was $97.3 million
resulting in a gross margin of 6.1% compared to $64.5 million cost of sales
and gross margin of 65.4% in the comparable period of the prior year. The
increase in cost of sales, attributable to mining costs, resulted primarily
from the costs associated with preparing the A-418 kimberlite pipe for
commercial production being capitalized in the comparable period of the prior
year. These same activities have been recorded as direct operating costs in
the current year. Also included in cost of sales for the six months ended July
31, 2009 is $9.8 million related to goods carried in inventory at January 31,
2009, which were sold subsequent to year end. The mining gross margin is
anticipated to fluctuate between quarters, resulting from variations in the
specific mix of product sold during each quarter and rough diamond prices.
    A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. Cost of sales also includes 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 $2.7 million from the
comparable period of the prior year primarily due to reduced incentive based
compensation and a reduction in discretionary spending.

    Mining Segment Operational Update

    Ore production for the second calendar quarter consisted of 0.7 million
carats produced from 0.13 million tonnes of ore from the A-154 South
kimberlite pipe and 0.8 million carats produced from 0.25 million tonnes of
ore from the A-418 kimberlite pipe. Rough diamond production was significantly
lower than the second calendar quarter from the prior year as a result of the
plan to reduce mining activity to reflect the softness in the rough diamond
market. Average grade increased slightly to 3.7 carats per tonne from 3.5
carats per tonne. The increase in average grade was primarily driven by a
significant increase in the grade of the ore from the A-154 South kimberlite
pipe.
    During the second calendar quarter, open pit mining and processing of the
A-154 South and A-418 kimberlite pipes continued. The Diavik Diamond Mine was
subsequently shut down from July 14, 2009 to August 24, 2009 inclusive.
General upkeep of the open pits and haulage roads was maintained during the
summer shutdown. Pre-delivery of ore to the processing plant was carried out
in preparation for the late-August resumption of production.
    Work continued on the underground pump stations and associated pipelines
as well as the related surface works, including commissioning of the new
crusher plant, expanded water treatment and power generation plants. The
underground mine is on track to commence operation in the first calendar
quarter of 2010.

    
    Harry Winston Diamond Limited Partnership'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,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Diamonds recovered (000s carats)    568      1,009      1,282      1,723
    Grade (carats/tonne)               3.73       3.52       3.97       3.74
    -------------------------------------------------------------------------
    


    Mining Segment Outlook

    A mine plan and revised budget for calendar 2009 was approved in the
first quarter of calendar 2009 by both Rio Tinto plc, the operator of the
Diavik Diamond Mine, and the Company. The updated plan incorporates various
production options that will enable the operation to adapt to changes in the
diamond market. The plan allows for changes to carat production by varying the
mix of ore that comes from the A-418 kimberlite pipe and the higher grade
A-154 South pit. The plan incorporates a six-week summer shutdown and a
contemplated second six-week shutdown at year end. A new mining technique is
under consideration for the potential mining of the A-21 resource, and
exploration work has identified extensions at depth to the A-418 and A-154
North kimberlite pipes.
    The summer shutdown was July 14, 2009 to August 24, 2009 inclusive and
will reduce goods available for sale by the Company in the third quarter of
fiscal 2010. Some site activity was continued where cost effective, such as
planned work associated with the processed kimberlite containment facility and
essential equipment maintenance.
    As a result of the summer shutdown, the Company expects to hold one
primary rough diamond sale in the third quarter compared to three primary
rough diamond sales in the comparable quarter of the prior year. The Company
plans to hold three primary rough diamond sales in the fourth quarter (total
fiscal 2010 rough diamond sales of eight) compared to two primary rough
diamond sales in the fourth quarter of the prior year (total fiscal 2009 rough
diamond sales of nine).

    PRICING

    The rough diamond market experienced a robust recovery during the second
quarter and pricing improved significantly. The current tone in the market has
encouraged diamond producers to sell-down inventory, but this has not led to
lower prices. The Company believes that rough and polished diamond prices are
now in balance. Further price increases will be led by recovering consumer
demand.

    PRODUCTION

    In calendar 2009, it is estimated that 1.3 million tonnes of open pit ore
will be mined, the majority of which will come from the A-418 kimberlite pipe,
with the remaining production coming from the A-154 South open pit. Total
carat production is expected to be between 5 and 6 million carats on a 100%
basis.
    The turmoil in the rough diamond market over the last year has required
the Diavik Diamond Mine operating team to maintain a flexible and nimble
approach to production planning. Since the market has improved substantially
and consistently since the end of the first quarter, there is now a new plan
under consideration for the balance of this calendar year and next year which
would, if adopted, see a reversal of the winter shutdown and delivery of
approximately 7.5 million carats during calendar 2010.
    Looking beyond calendar 2010, the objective is to feed a 2 million tonne
per year processing capability with a combination of underground and open pit
production. As underground capacity ramps up to approximately 1.5 million
tonnes per year, open pit production will synchronously decline to 0.5 million
tonnes per year from the A-418 open pit until this pit is finally closed at
the end of calendar 2012. The feasibility of mining the upper part of A-21 is
now under review with the objective that it becomes the supplemental ore
source to underground production beyond 2012.
    To extend production beyond 2022 will be dependent on bringing resources
and exploratory tonnages into reserves.

    COST OF SALES

    Cost of sales for the mining segment for fiscal 2009 included proceeds of
an insurance settlement related to a Diavik Diamond Mine shovel fire and
significant costs attributable to development activity versus production
activity during the A-418 pre-production period. After adjusting for these
factors, the Company expects cost of sales for the mining segment to increase
in fiscal 2010 by an estimated 10% to approximately $185 million. The 10%
increase is due in part to year-end operating costs that would normally be
carried over as cost of sales in the next fiscal year being expensed in the
current year due to the planned winter shutdown, and costs associated with
unsold inventory at the end of fiscal 2009.

    CAPITAL EXPENDITURES

    During the next three years, HWDLP's 40% share of the planned capital
expenditure is expected to be approximately $135 million at an assumed average
Canadian/US dollar exchange rate of $0.91. HWDLP's portion of capital
expenditure for the fiscal year ending January 31, 2010 is expected to be $49
million at an assumed average Canadian/US dollar exchange rate of $0.88, the
majority of which is related to underground development. During the first six
months of fiscal 2010, HWDLP's share of underground capital expenditures was
$33.5 million.
    Although underground development is substantially completed, limited
production is not expected to commence until calendar 2010. Further
development work that will allow for optimum production levels through the use
of different mining methods is expected to be undertaken throughout calendar
2010 and 2011. The Company expects to contribute $57 million over the
following two years in support of underground development, assuming an average
Canadian/US dollar exchange rate of $0.90. The balance of expected capital
expenditures during this period represents sustaining requirements.

    Retail

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


    
    (expressed in thousands of United States dollars)
    (quarterly results are unaudited)
    -------------------------------------------------------------------------
                                2010      2010      2009      2009      2009
                                  Q2        Q1        Q4        Q3        Q2
    -------------------------------------------------------------------------
    Sales                   $ 48,835  $ 51,953  $ 67,299  $ 57,907  $ 81,105
    Cost of sales             26,245    26,688    34,296    31,062    41,152
    -------------------------------------------------------------------------
    Gross margin              22,590    25,265    33,003    26,845    39,953
    Gross margin (%)           46.3%     48.6%     49.0%     46.4%     49.3%
    Selling, general
     and administrative
     expenses                 28,198    30,246    34,969    30,884    34,043
    -------------------------------------------------------------------------
    Earnings (loss)
     from operations        $ (5,608) $ (4,981) $ (1,966) $ (4,039) $  5,910
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    -------------------------------------------------------------------------
                                                               Six       Six
                                                            months    months
                                                             ended     ended
                                2009      2008      2008   July 31,  July 31,
                                  Q1        Q4        Q3      2009      2008
    -------------------------------------------------------------------------
    Sales                   $ 74,686  $ 84,957  $ 53,767  $100,788  $155,791
    Cost of sales             40,999    46,675    28,606    52,933    82,151
    -------------------------------------------------------------------------
    Gross margin              33,687    38,282    25,161    47,855    73,640
    Gross margin (%)           45.1%     45.1%     46.8%     47.5%     47.3%
    Selling, general
     and administrative
     expenses                 36,077    39,831    28,791    58,444    70,120
    -------------------------------------------------------------------------
    Earnings (loss)
     from operations        $ (2,390) $ (1,549) $ (3,630) $(10,589) $  3,520
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Three Months Ended July 31, 2009 Compared to Three Months Ended
    July 31, 2008
    

    RETAIL SALES

    Sales for the second quarter were $48.8 million compared to $81.1 million
for the comparable quarter of the prior year, a decrease of 40%. Sales in the
US market decreased 48% to $15.0 million, European sales decreased 44% to
$17.7 million, and Asian sales decreased 21% to $16.1 million.

    RETAIL COST OF SALES AND GROSS MARGIN

    Cost of sales for the retail segment or the second quarter was $26.2
million compared to $41.2 million for the comparable quarter of the prior
year. Gross margin for the quarter was $22.6 million or 46.3% compared to
$40.0 million or 49.3% 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 47.1% and 51.3%, respectively. Gross margin in the second quarter was
impacted by a combination of lower sales and the fixed cost leverage in cost
of sales.

    RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    SG&A expenses decreased to $28.2 million from $34.0 million in the
comparable quarter of the prior year and from $30.2 million in the first
quarter of this fiscal year. The decrease was due to an adjustment to
incentive based compensation, reduced advertising and selling expenses,
savings from staff reductions and reductions in discretionary spending. SG&A
expenses include depreciation and amortization expense of $3.2 million,
consistent with the comparable quarter of the prior year.

    
    Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008

    RETAIL SALES
    
    Sales for the six months ended July 31, 2009 were $100.8 million compared
to $155.8 million for the comparable period of the prior year, a decrease of
35%. Sales in the European market decreased 42% to $37.0 million, US sales
decreased 37% to $33.8 million, and Asian sales decreased 22% to $30.0
million.

    RETAIL COST OF SALES AND GROSS MARGIN

    Cost of sales for the retail segment for the six months ended July 31,
2009 was $52.9 million compared to $82.2 million for the comparable period of
the prior year. Gross margin for the six months ended July 31, 2009 was $47.9
million or 47.5% compared to $73.6 million or 47.3% 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, 2009
and the comparable period of the prior year would have been 48.4% and 49.4%,
respectively.

    RETAIL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    SG&A expenses decreased to $58.4 million from $70.1 million in the
comparable period of the prior year. The decrease was due to an adjustment to
incentive based compensation, reduced advertising and selling expenses,
savings from staff reductions and reductions in discretionary spending. SG&A
expenses include depreciation and amortization expense of $6.3 million,
consistent with the comparable quarter of the prior year.

    Retail Segment Operational Update

    During the second quarter, the retail segment recorded a 40% decline in
sales compared with the comparable quarter of the prior year. The decline in
sales was consistent throughout most regions except for the Japan market,
where sales were only 5% below the comparable period of the prior year. In
response to the challenging economic environment, the retail segment has
reduced inventory levels as well as capital expenditures. In addition, a
series of cost reduction measures have been implemented to better align the
retail cost structure with the current economic environment. The retail salon
network expansion plan for the year is limited to the Singapore salon, which
opened in July 2009, bringing the retail network to 19 salons.

    Retail Segment Outlook

    Harry Winston Inc. expects the economic environment to remain challenging
over the remainder of the year. Many retailers are anticipating fourth quarter
sales to improve over last year's disappointing holiday season. The retail
segment will continue cost- reduction initiatives, strict controls over
inventory purchasing and reductions in capital expenditures.
    With the approach of the holiday season, Harry Winston Inc. is optimistic
that its new collections of jewelry and watches will be well received by
customers. The cost-reduction initiatives taken in response to the recession,
coupled with the strength of the Harry Winston brand, are aimed at delivering
a higher level of sustainable profitability for the retail segment during the
anticipated economic recovery. The Company is committed to continue building
the Harry Winston brand over the long term.

    
    Liquidity and Capital Resources

    Working Capital
    
    As at July 31, 2009, the Company had unrestricted cash and cash
equivalents of $67.9 million and contingency cash collateral and reserves of
$0.3 million, compared to $16.7 million and $30.1 million, respectively, at
January 31, 2009. The Company had cash on hand and balances with banks of
$65.0 million and short-term investments of $2.9 million at July 31, 2009. The
short-term investments were held in overnight deposits. Total cash resources
were impacted by the $150.0 million net investment by Kinross and the
subsequent repayment by the Company of the mining segment's $74.2 million
senior secured term and revolving credit facilities on March 31, 2009.
    During the quarter ended July 31, 2009, the Company reported a use of
cash from operations of $20.0 million, compared to a source of cash of $46.2
million in the comparable quarter of the prior year. The current quarter use
of cash resulted from a combination of a significant reduction in net earnings
and in income taxes payable.
    Working capital increased to $296.6 million at July 31, 2009 from $195.1
million at January 31, 2009. During the second quarter, the Company increased
accounts receivable by $0.9 million; increased prepaid expenses and other
current assets by $0.8 million; decreased inventory by $18.3 million;
decreased accounts payable and accrued liabilities by $18.9 million; and
decreased income taxes payable by $25.5 million.
    The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital expenditure
programs, 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 of sales 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.
    With the closing of the Kinross transaction and the repayment in full of
the mining segment's senior secured credit facilities, the Company assesses
liquidity and capital resources on a consolidated basis. The Company's
requirements are for cash operating expenses, working capital, contractual
debt requirements and capital expenditures. The Company believes that it will
generate sufficient liquidity to meet its anticipated requirements for the
next 12 months.

    Financing Activities

    As at July 31, 2009, Harry Winston Inc. had $151.5 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
a decrease of $28.1 million from the amount outstanding at January 31, 2009.
    Also included in long-term debt of the Company's retail operations is a
25-year loan agreement for CHF 17.5 million ($16.1 million) used to finance
the construction of the Company's watch factory in Geneva, Switzerland. At
July 31, 2009, $15.3 million was outstanding compared to $14.7 million at
January 31, 2009. The bank has a secured interest in the factory building. In
addition, the Company has a demand credit facility of CHF 2.0 million ($1.8
million), supported by a $2.0 million standby letter of credit. At July 31,
2009, $1.4 million was outstanding compared to $0.5 million at January 31,
2009.
    Harry Winston Japan, K.K. maintains secured and unsecured credit
agreements with three banks amounting to (Yen)2,065 million ($21.7 million).
At July 31, 2009, $21.7 million had been drawn against these facilities and
classified as bank advances compared to $23.1 million at January 31, 2009,
$5.5 million of which was long term.
    At July 31, 2009, $0.8 million was drawn under the Company's revolving
financing facility relating to its Indian subsidiary, Harry Winston Diamond
(India) Private Limited. No amounts were outstanding under the revolving
financing facility for its Belgian subsidiary, Harry Winston Diamond
International N.V. at July 31, 2009. During the second quarter, the Company
repaid the revolving financing facility for its Israeli subsidiary, Harry
Winston Diamond (Israel) Limited, and the facility was subsequently cancelled.
At January 31, 2009, $18.4 million, $4.7 million and $1.5 million were drawn
under the Company's revolving financing facilities relating to Harry Winston
Diamond International N.V., Harry Winston Diamond (Israel) Limited and Harry
Winston Diamond (India) Private Limited, respectively.

    Investing Activities

    During the second quarter, the Company purchased capital assets of $15.8
million, of which $14.7 million were purchased for the mining segment and $1.1
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 level. Additionally, at the Joint
Venture level, 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, HWDLP
is obligated to fund 40% of the Joint Venture's total expenditures on a
monthly basis. HWDLP'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 calendar years 2009 to 2013, is
approximately $160 million assuming a Canadian/US average exchange rate of
$0.93 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)   $205,029  $  8,513  $ 16,463  $162,865  $ 17,188
    Environmental and
     participation
     agreements incremental
     commitments (c)          88,041    73,127     2,970     1,150    10,794
    Operating lease
     obligations (d)         109,427    18,817    27,085    19,495    44,030
    Capital lease
     obligations (e)           1,027       687       340         -         -
    -------------------------------------------------------------------------
    Total contractual
     obligations            $403,524  $101,144  $ 46,858  $183,510  $ 72,012
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (a) Long-term debt presented in the foregoing table includes current and
    long-term portions. Harry Winston Inc. maintains a 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, 2009, $151.1 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 CHF 17.5 million ($16.1 million) used to finance
    the construction of the Company's watch factory in Geneva,
    Switzerland. The loan agreement is comprised of a CHF 3.5 million
    ($3.2 million) loan and a CHF 14.0 million ($12.9 million) loan. The
    CHF 3.5 million loan bears interest at a rate of 3.9% and matures on
    April 22, 2013 (extended from April 22, 2010). The CHF 14.0 million
    loan bears interest at a rate of 3.55% and matures on January 31,
    2033. At July 31, 2009, $15.3 million was outstanding on the loan
    agreement compared to $14.7 million at January 31, 2009. The bank has
    a secured interest in the factory building. In addition, the Company
    has a demand credit facility of CHF 2.0 million ($1.8 million),
    supported by a $2.0 million standby letter of credit. The demand
    credit facility bears interest at a rate of 5.0% per annum. At July
    31, 2009, $1.4 million was outstanding, compared to $0.5 million at
    January 31, 2009.

    Harry Winston Japan, K.K. maintains unsecured credit agreements with
    two banks, each amounting to (Yen)1,490 million ($15.6 million). At
    July 31, 2009, $15.6 million had been drawn against these facilities
    and classified as bank advances. The credit facilities amounting to
    $7.8 million, $2.6 million and $5.2 million, bear interest at 1.98%,
    1.98% and 2.38%, respectively, and expired on August 31, 2009
    (subsequently extended to September 30, 2009), October 30, 2009 and
    June 28, 2010, respectively. Harry Winston Japan, K.K. also maintains
    a secured credit agreement amounting to (Yen)575 million ($6.1
    million) classified as bank advances. The facility is secured by
    inventory owned by Harry Winston Japan, K.K., bears interest at 2.15%
    and expires on December 18, 2009.

    The Company's first mortgage on real property has scheduled principal
    payments of approximately $0.1 million quarterly, and may be prepaid
    at any time. On July 31, 2009, $7.4 million was outstanding on the
    mortgage payable.

    (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, 2009,
    and have been included under long-term debt in the table above.
    Interest payments for the next 12 months are approximated to be $7.4
    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 operator of the Joint Venture has fulfilled such
    obligations for the security deposits by posting letters of credit of
    which HWDLP's share as at July 31, 2009 was $71.8 million based on
    its 40% ownership interest in the Diavik Diamond Mine. There can be
    no assurance that the operator will continue its practice of posting
    letters of credit in fulfillment of this obligation, in which event
    HWDLP would be required to post its proportionate share of such
    security directly, which would result in additional constraints on
    liquidity. 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 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 salons,
    office space and long-term leases for property, land, office premises
    and a fuel tank farm at the Diavik Diamond Mine. Harry Winston Inc.'s
    New York salon lease expires on December 17, 2010 with an option to
    renew.

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

    Dividend

    On March 19, 2009, the Company announced that it has suspended its
dividend for the time being.

    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

    Harry Winston Diamond Limited Partnership holds an undivided 40% interest
in the assets, liabilities and expenses of the Diavik Diamond Mine and the
Diavik group of mineral claims. Harry Winston Diamond Limited Partnership is
owned 77.5% by the Company and 22.5% by Kinross Gold Corporation. The Diavik
Diamond Mine and the exploration and development of the Diavik group of
mineral claims is a joint arrangement between DDMI (60%) and HWDLP (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 HWDLP that the Company may not have sufficient cash to meet. A
failure to meet capital expenditure requirements imposed by DDMI could result
in HWDLP's interest in the Diavik Diamond Mine and the Diavik group of mineral
claims being diluted.

    Agreement with Kinross

    Under the amended partnership agreement of HWDLP, the general partner is
entitled to request that the partners in the partnership advance funds to the
partnership pro rata based on their holdings of partnership units for the
purpose of satisfying the partnership's obligations under various contractual
commitments, including those deriving from the joint arrangement between DDMI
and the partnership. The partners may unanimously determine to fund any cash
call by way of a loan rather than equity contribution. If a partner fails to
contribute its proportion of funds with respect to a cash call, the
non-defaulting partner or partners will have the option, but not the
obligation, to fund the defaulting partner's portion of the cash call by way
of equity contribution or loan or a combination of the two; provided that if
any equity contribution is made, the non-defaulting partner's interest in the
partnership will be increased proportionately through the issuance of
additional partnership units.
    As DDMI, under the joint arrangement between DDMI and the partnership, is
able to determine the timing and scope of future project capital expenditures
and to impose capital expenditure requirements on the Company that the Company
may not have sufficient cash to meet, the Company's interest in HWDLP could be
diluted under the amended partnership agreement as a result of a failure by
the Company to meet cash call requirements imposed by the amended partnership
agreement.

    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 or in diamonds available for sale could also negatively affect the
price of diamonds. In each case, such developments could materially adversely
affect the Company's results of operations.

    Cash Flow and Liquidity

    The Company's liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital expenditure
programs, 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 of sales 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. There can be no
assurance that the Company will be able to meet each or all of its liquidity
requirements. A failure by the Company to meet its liquidity requirements
could result in the Company failing to meet its planned development
objectives, or in the Company being in default of a contractual obligation,
each of which could have a material adverse effect on the Company's business
prospects or financial condition.

    Economic Environment

    The Company's financial results are tied to the global economic
environment. The global markets are experiencing the impact of a significant
US and international economic downturn. This could restrict the Company's
growth opportunities both domestically and internationally. Should economic
conditions not improve or further deteriorate, the Company could experience
revenue pressure across both its business segments and a decrease in the
availability of credit, which could have a material adverse effect on the
Company's business prospects or financial condition.

    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 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 requires licenses and permits from the Canadian government. The
Diavik Diamond Mine Type "A" Water License was renewed by the regional
Wek'eezhii Land and Water Board to October 31, 2015. 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 has established 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.
    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
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.

    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, 2009.

    
    Changes in Accounting Policies

    Goodwill and Intangibles Assets
    
    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. The Company adopted the new standard effective February 1,
2009. This standard has had no material impact on the consolidated financial
statements.

    
    Recently Issued Accounting Standards

    Credit Risk and the Fair Value of Financial Assets and Liabilities
    
    In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Liabilities". This abstract requires companies to take
each counterparty's credit risk into account when measuring the fair value of
financial assets and liabilities, including derivatives. The Company applied
this EIC for the quarter ended April 30, 2009. This abstract has had no
material impact on the consolidated financial statements.

    Mining Exploration Costs

    In March 2009, the CICA issued EIC-174, "Mining Exploration Costs", which
provides guidance on the capitalization of exploration costs related to mining
properties and the subsequent impairment review of capitalized exploration
costs. The Company applied this EIC for the quarter ended April 30, 2009. This
abstract has had no material impact on the consolidated financial statements.

    Financial Instruments

    In June 2009, the CICA amended Handbook Section 3862, "Financial
Instruments - Disclosures", to enhance disclosure requirements for fair value
measurement of financial instruments and liquidity risk. The changes are
effective for annual financial statements relating to fiscal years ending
after September 30, 2009. The Company is currently assessing the impact of
this amendment on the consolidated financial statements.

    International Financial Reporting Standards ("IFRS")

    In February 2008, the Canadian Accounting Standards Board confirmed that
publicly accountable enterprises will be required to adopt IFRS in place of
Canadian Generally Accepted Accounting Principles ("GAAP") for financial
periods beginning on or after January 1, 2011. Accordingly, commencing
February 1, 2011, the Company will convert over to IFRS and prepare its first
financial statements in accordance with IFRS for the three-month period ended
April 30, 2011, with comparative information also prepared under IFRS.
    The conversion project from Canadian GAAP to IFRS is led by finance
management, and includes representatives from various areas of the Company as
necessary to plan for and achieve a smooth transition. The Company has engaged
the services of a third party expert advisor to assist. Regular progress
reporting to senior management and to the Audit Committee on the status of the
IFRS conversion project is in place. The conversion project consists of three
phases:

    
      Assessment Phase - This phase involves a review of accounting
      differences between Canadian GAAP and IFRS; an evaluation of IFRS 1
      exemptions for first time IFRS adopters; and a high-level impact
      assessment on systems and business processes.

      Design Phase - This phase involves prioritizing and resolving
      accounting treatment issues; quantifying the impact of converting to
      IFRS; reviewing and approving accounting policy choices; performing a
      detailed impact assessment on systems and processes; designing system
      and business process changes; developing IFRS training material; and
      drafting IFRS financial statement content.

      Implementation Phase - This phase involves changes to systems and
      business processes; determining the opening IFRS transition balance
      sheet; dual accounting under both Canadian GAAP and IFRS; and
      preparing detailed reconciliations of Canadian GAAP to IFRS financial
      statements.
    

    Although the Company's IFRS conversion project consists of three
sequential phases, certain aspects of each phase sometimes occur concurrently,
resulting in the analysis of certain areas being further developed than in
other areas.

    EXPECTED ACCOUNTING DIFFERENCES BETWEEN CANADIAN GAAP & IFRS

    At July 31, 2009, the Company had substantially completed the Assessment
Phase of its IFRS conversion project. The following areas have been identified
where the accounting differences between Canadian GAAP and existing IFRS may
have an impact on the Company's consolidated financial statements. The
accounting differences described below should not be regarded as a complete
list of areas that may be impacted by the transition to IFRS. Analysis of
accounting differences is still in progress, particularly where choices of
accounting policies are available.

    
      Property, plant and equipment - Separate accounting for components of
      property, plant and equipment is more vigorously applied and broader
      under IFRS. Costs are allocated to significant parts of an asset if the
      useful lives differ, and each part is then separately depreciated.

      Exploration and evaluation - IFRS 6, "Exploration for and Evaluation of
      Mineral Resources", allows an entity to either develop a new accounting
      policy for exploration and evaluation expenditures consistent with IFRS
      requirements or continue to follow the Company's existing policy.

      Income taxes - Existing IFRS requires the recognition of deferred taxes
      in situations not required under Canadian GAAP. Specifically, a
      deferred tax liability (asset) is recognized for exchange gains and
      losses relating to foreign non-monetary assets and liabilities that are
      remeasured into the functional currency using historical exchange
      rates. Similar timing differences are also recognized for the
      difference in tax bases between jurisdictions as a result of intra-
      group transfer of assets.

      Asset impairment - Under IFRS, assets are tested for impairment either
      individually or within cash generating units. This approach reflects
      the smallest group of assets capable of generating largely independent
      cash inflows, which may differ from asset groups under Canadian GAAP.
      Impairment charges relating to long-lived assets may be more frequent
      under IFRS as the cash flow test for recoverability is based on a one
      step discounted cash flow approach. Impairment under IFRS is recognized
      if the carrying amount exceeds the higher of fair value less cost to
      sell, or value in use. Reversal of impairment charges is required under
      IFRS if the circumstances leading to the impairment have changed.
    

    In addition, the International Accounting Standards Board has a number of
ongoing projects that could result in the issuance of new IFRS that could
affect the ultimate differences between Canadian GAAP and IFRS. In particular,
we expect that there may be revised IFRS issued and in effect in relation to
joint arrangements and income taxes. The Company is monitoring these
international accounting developments.
    The Company also anticipates a significant increase in disclosure within
its consolidated financial statements resulting from the adoption of IFRS and
is continuing to assess the level of disclosure required.

    FIRST TIME ADOPTION OF IFRS

    IFRS 1, "First Time Adoption of International Financial Reporting
Standards" ("IFRS 1"), provides mandatory guidance that generally requires
full retrospective application of the IFRS and interpretations from the date
of transition, February 1, 2010. All material accounting differences leading
up to February 1, 2010 between Canadian GAAP and IFRS will be eliminated
generally through opening retained earnings at the date of transition.
However, IFRS 1 allows certain optional exemptions in the application of
particular standards to prior periods in order to assist companies with the
transition process. The Company is continuing to evaluate the IFRS 1 optional
exemptions available.
    At this time, the impact on the Company's financial position and results
of operations is not reasonably determinable or estimable for any of the IFRS
conversion areas identified. From the perspective of the Company's systems and
controls, no significant impact has currently been identified from
management's high-level impact assessment on systems and business processes
carried out to date.

    Outstanding Share Information

    As at July 31, 2009
    -------------------------------------------------------------------------
    Authorized                                                     Unlimited
    Issued and outstanding shares                                 76,588,592
    Options outstanding                                            3,234,179
    Fully diluted                                                 79,822,771
    -------------------------------------------------------------------------

    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,
                                                          2009          2009
                                                    (unaudited)
    -------------------------------------------------------------------------
    Assets
    Current assets:
      Cash and cash equivalents (note 3)          $     67,903  $     16,735
      Cash collateral and cash reserves (note 3)           288        30,145
      Accounts receivable (note 13)                     18,031        66,980
      Inventory and supplies (note 4)                  321,113       346,235
      Prepaid expenses and other current assets         52,416        48,130
    -------------------------------------------------------------------------
                                                       459,751       508,225
    Mining capital assets                              812,914       800,358
    Retail capital assets                               65,304        68,258
    Intangible assets, net (note 6)                    129,929       130,752
    Other assets                                        15,082        15,644
    Future income tax asset                             50,038        43,338
    -------------------------------------------------------------------------
                                                  $  1,533,018  $  1,566,575
                                                  ---------------------------
                                                  ---------------------------
    Liabilities and Shareholders' Equity
    Current liabilities:
      Accounts payable and accrued liabilities    $     90,542  $    118,390
      Income taxes payable                              47,656        76,987
      Bank advances                                     23,883        42,621
      Current portion of long-term debt (note 7)         1,109        75,097
    -------------------------------------------------------------------------
                                                       163,190       313,095
    Long-term debt (note 7)                            173,065       205,625
    Future income tax liability                        291,601       303,284
    Other long-term liability                            1,958         1,946
    Future site restoration costs                       40,105        39,506
    Non-controlling interest (note 1)                  180,068           280

    Shareholders' Equity:
      Share capital (note 8)                           426,281       381,541
      Contributed surplus                               17,357        16,079
      Retained earnings                                213,572       283,177
      Accumulated other comprehensive income            25,821        22,042
    -------------------------------------------------------------------------
                                                       683,031       702,839
    Commitments and guarantees (note 9)
    -------------------------------------------------------------------------
                                                  $  1,533,018  $  1,566,575
                                                  ---------------------------
                                                  ---------------------------

    See accompanying notes to consolidated financial statements.




                     Consolidated Statements of Earnings
              (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
                          EXCEPT PER SHARE AMOUNTS)


                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              July 31,     July 31,     July 31,     July 31,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Sales                 $    94,776  $   186,119  $   204,419  $   342,198
    Cost of sales              66,294       73,542      150,238      146,691
    -------------------------------------------------------------------------
    Gross margin               28,482      112,577       54,181      195,507
    Selling, general and
     administrative
     expenses                  32,380       39,194       68,129       82,479
    -------------------------------------------------------------------------
    Earnings (loss) from
     operations                (3,898)      73,383      (13,948)     113,028
    -------------------------------------------------------------------------
    Interest and financing
     expenses                  (2,998)      (5,366)      (6,697)     (10,819)
    Other income                   83          815          364        1,061
    Insurance settlement
     (note 13)                      -            -        3,250            -
    Dilution loss (note 14)      (539)           -      (34,761)           -
    Foreign exchange
     gain (loss)              (25,274)       5,301      (31,113)       5,456
    -------------------------------------------------------------------------
    Earnings (loss) before
     income taxes             (32,626)      74,133      (82,905)     108,726
    Income tax expense
     - Current                  2,019       27,589        1,194       49,089
    Income tax recovery
     - Future                  (7,681)      (3,404)      (9,976)     (11,568)
    -------------------------------------------------------------------------
    Earnings (loss) before
     non-controlling
     interest                 (26,964)      49,948      (74,123)      71,205
    Non-controlling
     interest (note 1)         (2,443)           1       (4,518)           2
    -------------------------------------------------------------------------
    Net earnings (loss)   $   (24,521) $    49,947  $   (69,605) $    71,203
                          ---------------------------------------------------
                          ---------------------------------------------------
    Earnings (loss) per
     share
      Basic               $     (0.32) $      0.81  $     (0.97) $      1.17
                          ---------------------------------------------------
                          ---------------------------------------------------
      Fully diluted       $     (0.32) $      0.81  $     (0.97) $      1.17
                          ---------------------------------------------------
                          ---------------------------------------------------
    Weighted average
     number of shares
     outstanding           76,579,975   61,372,091   71,509,367   60,655,424
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to consolidated financial statements.




               Consolidated Statements of Comprehensive Income
              (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)


                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              July 31,     July 31,     July 31,     July 31,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Net earnings (loss)   $   (24,521) $    49,947  $   (69,605) $    71,203
    Other comprehensive
     income
      Net gain (loss) on
       translation of net
       foreign operations
       (net of tax - nil)       3,693         (654)       3,779        1,935
    -------------------------------------------------------------------------
    Total comprehensive
     income (loss)        $   (20,828) $    49,293  $   (65,826) $    73,138
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to consolidated financial statements.




         Consolidated Statements of Changes in Shareholders' Equity
        (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)

                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              July 31,     July 31,     July 31,     July 31,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    COMMON SHARES:
    Balance at beginning
     of period            $   426,299  $   381,541  $   381,541  $   305,502
    Issued during the
     period                       (18)           -       44,740       76,039
    -------------------------------------------------------------------------
    Balance at end of
     period                   426,281      381,541      426,281      381,541
    -------------------------------------------------------------------------
    CONTRIBUTED SURPLUS:
    Balance at beginning
     of period                 17,154       15,769       16,079       15,614
    Stock option expense          203          137        1,278          292
    -------------------------------------------------------------------------
    Balance at end
     of period                 17,357       15,906       17,357       15,906
    -------------------------------------------------------------------------
    RETAINED EARNINGS:
    Balance at beginning
     of period                238,093      243,521      283,177      225,334
    Net earnings (loss)       (24,521)      49,947      (69,605)      71,203
    Dividends paid                  -       (3,070)           -       (6,139)
    -------------------------------------------------------------------------
    Balance at end
     of period                213,572      290,398      213,572      290,398
    -------------------------------------------------------------------------
    ACCUMULATED OTHER
     COMPREHENSIVE INCOME:
    Balance at beginning
     of period                 22,128       27,801       22,042       25,212
    Other comprehensive
     income
    Net gain (loss) on
     translation of net
     foreign operations
     (net of tax - nil)         3,693         (654)       3,779        1,935
    -------------------------------------------------------------------------
    Balance at end of period   25,821       27,147       25,821       27,147
    -------------------------------------------------------------------------
    Total Shareholders'
     Equity               $   683,031  $   714,992  $   683,031  $   714,992
                          ---------------------------------------------------
                          ---------------------------------------------------

    See accompanying notes to consolidated financial statements.




                    Consolidated Statements of Cash Flows
        (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)


                                Three        Three          Six          Six
                               months       months       months       months
                                ended        ended        ended        ended
                              July 31,     July 31,     July 31,     July 31,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Cash provided by
     (used in):
    Operating
    Net earnings (loss)   $   (24,521) $    49,947  $   (69,605) $    71,203
    Items not involving
     cash:
      Amortization and
       accretion               16,971       16,778        34,646      30,733
      Future income
       tax recovery            (7,681)      (3,404)       (9,976)    (11,568)
      Stock-based
       compensation and
       pension expense            225          222         1,290         579
      Foreign exchange
       loss (gain)             24,604       (5,677)       31,098      (6,251)
      Loss on disposal
       of assets                    -           19             -         489
    Non-controlling
     interest                  (2,443)           1        (4,518)          2
    Dilution loss                 539            -        34,761           -
    Change in non-cash
     operating working
     capital                  (27,729)     (11,679)        1,066      (4,671)
    -------------------------------------------------------------------------
                              (20,035)      46,207        18,762      80,516
    -------------------------------------------------------------------------
    Financing
    Decrease in
     long-term debt               (74)     (14,691)         (122)    (27,168)
    Increase (decrease)
     in revolving credit      (12,929)      25,235       (51,845)    180,425
    Repayment of mining
     segment senior
     secured term and
     revolving credit
     facilities                     -            -       (74,160)          -
    Repayment of Harry
     Winston Inc. 2008
     revolving credit
     facility                       -            -             -    (159,109)
    Distribution to Kinross    (6,750)           -        (6,750)          -
    Dividends paid                  -       (3,070)            -      (6,139)
    Issue of common shares,
     net of issue costs           (18)           -        44,740      76,039
    -------------------------------------------------------------------------
                              (19,771)       7,474       (88,137)     64,048
    -------------------------------------------------------------------------
    Investing
    Subscription of
     partnership units           (696)           -       125,095           -
    Cash collateral and
     cash reserve                 (28)       8,635        29,857         312
    Mining capital assets     (14,673)     (63,284)      (36,802)   (129,908)
    Retail capital assets      (1,128)      (4,413)       (1,567)     (7,656)
    Other assets                 (525)           -          (307)         (1)
    -------------------------------------------------------------------------
                              (17,050)     (59,062)      116,276    (137,253)
    -------------------------------------------------------------------------
    Foreign exchange effect
     on cash balances           2,762          (77)        4,267        (621)
    Increase (decrease) in
     cash and cash
     equivalents              (54,094)      (5,458)       51,168       6,690
    Cash and cash
     equivalents, beginning
     of period (note 3)       121,997       61,776        16,735      49,628
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end of
     period (note 3)      $    67,903  $    56,318  $     67,903  $   56,318
                          ---------------------------------------------------
                          ---------------------------------------------------
    Change in non-cash
     operating working
     capital
    Accounts receivable          (863)      (6,459)       49,173      (4,727)
    Prepaid expenses and
     other current assets        (835)       5,969        (4,936)      1,534
    Inventory and supplies     18,345       (4,409)       25,121     (22,986)
    Accounts payable and
     accrued liabilities      (18,911)      (3,864)      (31,018)     14,835
    Income taxes payable      (25,465)      (2,916)      (37,274)      6,673
    -------------------------------------------------------------------------
                          $   (27,729) $   (11,679) $      1,066  $   (4,671)
    -------------------------------------------------------------------------
    Supplemental cash
     flow information
    Cash taxes paid       $    25,662  $    30,373  $     36,478  $   42,568
    Cash interest paid    $     2,392  $     4,390  $      6,139  $    8,798
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



                 Notes to Consolidated Financial Statements

                   JULY 31, 2009 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 an ownership 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 Limited Partnership
    ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in
    the assets, liabilities and expenses. DDMI is the operator of the Diavik
    Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada.
    DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England. As
    a result of the strategic investment by Kinross Gold Corporation
    ("Kinross") of Toronto, Canada, described below, HWDLP is 77.5% owned by
    the Company and 22.5% owned by Kinross. Kinross's 22.5% ownership is
    reported in the consolidated financial statements as part of non-
    controlling interest.

    On March 31, 2009, Kinross made a net investment of $150.0 million to
    acquire an indirect interest in the Diavik Diamond Mine and a direct
    equity stake in the Company. Kinross subscribed for 15.2 million of the
    Company's treasury shares at a price of $3.00 per share, being
    approximately 19.9% of the Company's issued equity post the transaction.
    Kinross also subscribed for new partnership units representing a 22.5%
    interest in HWDLP, for a net effective subscription value of $103.7
    million. With the closing of the Kinross transaction, the Company's
    economic interest in the Diavik Diamond Mine is 31%.

    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,
    2009, 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, 2009.

    Adoption of New Accounting Standards and Developments

    GOODWILL AND INTANGIBLE ASSETS

    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. The Company adopted the new standard effective
    February 1, 2009. This standard has had no material impact on the
    consolidated financial statements.

    Recently Issued Accounting Standards

    CREDIT RISK AND THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

    In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
    of Financial Assets and Liabilities". This abstract requires companies to
    take each counterparty's credit risk into account when measuring the fair
    value of financial assets and liabilities, including derivatives. The
    Company applied this EIC for the quarter ended April 30, 2009. This
    abstract has had no material impact on the consolidated financial
    statements.

    MINING EXPLORATION COSTS

    In March 2009, the CICA issued EIC-174, "Mining Exploration Costs", which
    provides guidance on the capitalization of exploration costs related to
    mining properties and the subsequent impairment review of capitalized
    exploration costs. The Company applied this EIC for the quarter ended
    April 30, 2009. This abstract has had no material impact on the
    consolidated financial statements.

    FINANCIAL INSTRUMENTS

    In June 2009, the CICA amended Handbook Section 3862, "Financial
    Instruments - Disclosures", to enhance disclosure requirements for fair
    value measurement of financial instruments and liquidity risk. The
    changes are effective for annual financial statements relating to fiscal
    years ending after September 30, 2009. The Company is currently assessing
    the impact of this amendment on the consolidated financial statements.

    NOTE 3:

    Cash Resources
                                                       July 31,   January 31,
                                                          2009          2009
    -------------------------------------------------------------------------
    Cash on hand and balances with banks          $     65,024  $     14,118
    Short-term investments(a)                            2,879         2,617
    -------------------------------------------------------------------------
    Total cash and cash equivalents                     67,903        16,735
    Cash collateral and cash reserves                      288        30,145
    -------------------------------------------------------------------------
    Total cash resources                          $     68,191  $     46,880
                                                 ----------------------------
                                                 ----------------------------
    (a) Short-term investments are held in overnight deposits.

    Total cash resources were impacted by the $150.0 million net investment
    by Kinross and the subsequent repayment of the mining segment's senior
    secured term and revolving credit facilities on March 31, 2009.

    NOTE 4:

    Inventory and Supplies
                                                       July 31,   January 31,
                                                          2009          2009
    -------------------------------------------------------------------------
    Rough diamond inventory                       $     13,145  $     31,872
    Merchandise inventory                              232,068       240,419
    Supplies inventory                                  75,900        73,944
    -------------------------------------------------------------------------
    Total inventory and supplies                  $    321,113  $    346,235
                                                 ----------------------------
                                                 ----------------------------

    During the six months ended July 31, 2009, the Company recorded a write-
    down of $4.1 million on rough diamond inventory (nil for the three months
    ended July 31, 2009), which was recorded in cost of sales.

    NOTE 5:

    Diavik Joint Venture

    The following represents Harry Winston Diamond Limited Partnership's 40%
    proportionate interest in the Joint Venture as at June 30, 2009 and
    December 31, 2008:
                                                       July 31,   January 31,
                                                          2009          2009
    -------------------------------------------------------------------------
    Current assets                                $    111,557  $    105,612
    Long-term assets                                   769,384       754,886
    Current liabilities                                 34,140        38,808
    Long-term liabilities and participant's
     account                                           846,801       821,690
    -------------------------------------------------------------------------

                                      Three      Three        Six        Six
                                     months     months     months     months
                                      ended      ended      ended      ended
                                    July 31,   July 31,   July 31,   July 31,
                                       2009       2008       2009       2008
    -------------------------------------------------------------------------
    Expenses net of interest
     income of $0.1 million
     (2008 - interest income of
     $0.1 million)(a)(b)             40,672     43,671     82,568     77,630
    Cash flows resulting from
     (used in) operating
     activities                     (38,608)   (33,830)   (58,014)   (61,221)
    Cash flows resulting from
     financing activities            48,577     86,377     95,596    175,501
    Cash flows resulting from
     (used in) investing
     activities                     (15,951)   (50,181)   (39,242)  (114,973)
    -------------------------------------------------------------------------
    (a) The Joint Venture only earns interest income.
    (b) Expenses net of interest income for the six months ended July 31,
        2009 of $0.3 million (six months ended July 31, 2008 of
        $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

                  Amortization             Accumulated   July 31, January 31,
                        period       Cost  amortization  2009 net   2009 net
    -------------------------------------------------------------------------
    Trademark   indefinite life  $ 112,995  $     -      $ 112,995  $ 112,995
    Drawings    indefinite life     12,365        -         12,365     12,365
    Wholesale
     distri-
     bution
     network    120 months           5,575    2,205          3,370      3,649
    Store
     leases     65 to 105 months     5,639    4,440          1,199      1,743
    -------------------------------------------------------------------------
    Intangible
     assets                      $ 136,574  $ 6,645      $ 129,929  $ 130,752
                                 --------------------------------------------
                                 --------------------------------------------

    Amortization expense for the six months ended July 31, 2009 was $0.8
    million ($1.1 million for the six months ended July 31, 2008).

    NOTE 7:
    Long-Term Debt
                                                       July 31,   January 31,
                                                          2009          2009
    -------------------------------------------------------------------------
    Mining segment credit facilities              $          -  $     74,107
    Harry Winston Inc. credit facilities               166,740       199,846
    First mortgage on real property                      7,434         6,769
    -------------------------------------------------------------------------
    Total long-term debt                               174,174       280,722
    -------------------------------------------------------------------------
    Less current portion                                (1,109)      (75,097)
    -------------------------------------------------------------------------
                                                  $    173,065  $    205,625
                                                  ---------------------------
                                                  ---------------------------

    On March 31, 2009, with the closing of the Kinross transaction, the
    Company repaid all amounts outstanding on the mining segment's senior
    secured term and revolving credit facilities.

    NOTE 8:

    Share Capital

    (a) Authorized

        Unlimited common shares without par value.

    (b) Issued

                                              Number of shares        Amount
    -------------------------------------------------------------------------
    Balance, January 31, 2009                       61,372,092  $    381,541
    SHARES ISSUED FOR:
    Cash                                            15,200,000        44,685
    Cash on exercise of options                         16,500            55
    -------------------------------------------------------------------------
    Balance, July 31, 2009                          76,588,592  $    426,281
                                                  ---------------------------
                                                  ---------------------------
    (c) Stock Options

    During the six months ended July 31, 2009, the Company issued 1,674,000
    stock options to officer and employees of the Company and its affiliates.
    These options vested 50% immediately; 25% will vest on the first
    anniversary date and the remaining 25% will vest on the second
    anniversary date of the date of grant. The maximum term of these options
    is 10 years. The Company estimated the fair value of the options granted
    using the Black-Scholes option pricing model. Compensation expense for
    stock options was $1.3 million for the six months ended July 31, 2009
    ($0.3 for the six months ended July 31, 2008) and is presented as a
    component of selling, general and administrative expenses. The Company
    used historical exercise data to determine the expected term of the
    options granted.

    (d) RSU and DSU Plans

    RSU                                                      Number of units
    -------------------------------------------------------------------------
    Balance, January 31, 2009                                        108,599
    AWARDS AND PAYOUTS DURING THE PERIOD (NET):
     RSU awards                                                       11,500
     RSU payouts                                                     (50,369)
    -------------------------------------------------------------------------
    Balance, July 31, 2009                                            69,730
                                                                   ----------
                                                                   ----------

    DSU                                                      Number of units
    -------------------------------------------------------------------------
    Balance, January 31, 2009                                        128,988
    AWARDS AND PAYOUTS DURING THE PERIOD (NET):
     DSU awards                                                       44,714
     DSU payouts                                                           -
    -------------------------------------------------------------------------
    Balance, July 31, 2009                                           173,702
                                                                   ----------
                                                                   ----------


                                      Three      Three        Six        Six
                                     months     months     months     months
                                      ended      ended      ended      ended
    Expense (recovery) for          July 31,   July 31,   July 31,   July 31,
     the period                        2009       2008       2009       2008
    -------------------------------------------------------------------------
    RSU                           $      77  $    (174) $      17  $     335
    DSU                                 290       (330)       416        237
    -------------------------------------------------------------------------
                                  $     367  $    (504) $     433  $     572
                                  -------------------------------------------
                                  -------------------------------------------

    During the six months ended July 31, 2009, the Company granted 11,500
    RSUs and 44,714 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.

    Grants under the RSU Plan are on a discretionary basis to employees of
    the Company subject to Board of Director approval or in accordance with
    employment contracts. 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 the 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 the grant.

    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. HWDLP's share of this funding requirement is $0.2 million for
    calendar 2009. Further funding will be required in future years; however,
    specific amounts have not yet been determined. 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. HWDLP's share
    of the letters of credit outstanding posted by the operator of the Joint
    Venture with respect to the environmental agreements as at July 31, 2009
    was $71.8 million. The agreement specifically provides that these funding
    requirements 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 12 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 Harry Winston Diamond Limited Partnership's 40% ownership
    interest, before any reduction of future reclamation activities, and
    future minimum annual rentals under non-cancellable operating and capital
    leases for retail salons, corporate office space, and long-term leases
    for property, land, office premises and a fuel tank farm at the Diavik
    Diamond Mine and are as follows:

      2010                              $ 92,631
      2011                                89,803
      2012                                88,702
      2013                                86,674
      2014                                86,908
      Thereafter                         132,071
      -------------------------------------------

    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               2009      2008      2009      2008
    -------------------------------------------------------------------------
    Defined benefit pension plan
     - Harry Winston retail segment   $    454  $    403  $    958  $    814
    Defined contribution plan
    - Harry Winston retail segment         210       235       420       469
    Defined contribution plan
    - Harry Winston mining segment         101         -       101         -
    Defined contribution plan
    - Diavik Diamond Mine                  223       285       401       497
    -------------------------------------------------------------------------
                                      $    988  $    923  $  1,880  $  1,780
                                      ---------------------------------------
                                      ---------------------------------------

    NOTE 11:

    Capital Management

    As part of the Kinross investment, the Company and Kinross have agreed to
    certain provisions regarding capital management for a period of two years
    following closing subject to earlier termination in specified
    circumstances. During this period, without Kinross' consent not to be
    unreasonably withheld, the Company has agreed not to incur indebtedness
    in excess of a specified amount, subject to an exception for indebtedness
    incurred to finance an acquisition by the Company. In addition, the
    Company has agreed not to pay dividends and to limit the amount of
    funding it will provide to the retail segment. The capital management
    provisions do not in any way limit the Company's ability to issue equity
    or equity-linked securities subject to compliance with Kinross' pro rata
    participation right in such equity issuances.

    NOTE 12:

    Financial Instruments

    The Company has various financial instruments comprising 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 Company's long-term debt is fully secured; hence the fair value of
    this instrument at July 31, 2009 is considered to approximate its
    carrying value.

    The carrying values of these financial instruments are as follows:

                                       July 31, 2009        January 31, 2009
    -------------------------------------------------------------------------
                               Estimated    Carrying   Estimated    Carrying
                              fair value       value  fair value       value
    -------------------------------------------------------------------------
    FINANCIAL ASSETS:
      Cash and cash
       equivalents             $  67,903   $  67,903   $  16,735   $  16,735
      Cash collateral and
       cash reserves                 288         288      30,145      30,145
      Accounts receivable         18,031      18,031      66,980      66,980
    -------------------------------------------------------------------------
                               $  86,222   $  86,222   $ 113,860   $ 113,860
                               ----------------------------------------------
                               ----------------------------------------------

    FINANCIAL LIABILITIES:
     Accounts payable and
      accrued liabilities      $  90,542   $  90,542   $ 118,390   $ 118,390
     Bank advances                23,883      23,883      42,621      42,621
     Long-term debt              174,174     174,174     280,722     280,722
    -------------------------------------------------------------------------
                               $ 288,599   $ 288,599   $ 441,733   $ 441,733
                               ----------------------------------------------
                               ----------------------------------------------
    NOTE 13:

    Insurance Settlement

    In December 2008, approximately $31.7 million in Company-owned and
    consigned retail inventory at cost was stolen during a second robbery at
    the Harry Winston Paris salon. Included in accounts receivable at January
    31, 2009 is a $48.4 million receivable relating to the insurance
    settlement that was received in February 2009. The $3.3 million balance
    of the insurance claim was also received during the first quarter.

    NOTE 14:

    Dilution Loss

    The Company recorded a non-cash dilution loss of $34.8 million with
    respect to the investment by Kinross of an indirect interest in the
    Diavik Diamond Mine.

    NOTE 15:

    Segmented Information

    The Company operates in two segments within the diamond industry, mining
    and retail, for the three months ended July 31, 2009.

    The mining segment consists of the Company's rough diamond business. This
    business includes the 40% ownership 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, 2009                            Mining      Retail       Total
    -------------------------------------------------------------------------
    Revenue
      Canada                              $   45,941  $        -  $   45,941
      United States                                -      15,035      15,035
      Europe                                       -      17,688      17,688
      Asia                                         -      16,112      16,112
    Cost of sales                             40,049      26,245      66,294
    -------------------------------------------------------------------------
    Gross margin                               5,892      22,590      28,482
    Gross margin (%)                           12.8%       46.3%       30.1%
    Selling, general and
     administrative expenses                   4,182      28,198      32,380
    -------------------------------------------------------------------------
    Earnings (loss) from operations            1,710      (5,608)     (3,898)
    -------------------------------------------------------------------------
    Interest and financing expenses             (869)     (2,129)     (2,998)
    Other income                                  79           4          83
    Dilution loss                               (539)          -        (539)
    Foreign exchange gain (loss)             (26,525)      1,251     (25,274)
    -------------------------------------------------------------------------
    Segmented loss before income taxes    $  (26,144) $   (6,482) $  (32,626)
                                         ------------------------------------
                                         ------------------------------------
    Segmented assets as at July 31, 2009
      Canada                              $  995,011  $        -  $  995,011
      United States                                -     365,424     365,424
      Other foreign countries                 13,899     158,684     172,583
    -------------------------------------------------------------------------
                                          $1,008,910  $  524,108  $1,533,018
    -------------------------------------------------------------------------
    Capital expenditures                  $   14,673  $    1,128  $   15,801
    OTHER SIGNIFICANT NON-CASH ITEMS:
      Income tax recovery                 $   (4,226) $   (3,455) $   (7,681)
      Amortization and accretion          $   13,760  $    3,211  $   16,971
    -------------------------------------------------------------------------

    Sales to three significant customers in the mining segment totalled $13.8
    million for the three months ended July 31, 2009 ($12.2 million for the
    three months ended July 31, 2008).


    For the three months ended
     July 31, 2008                            Mining      Retail       Total
    -------------------------------------------------------------------------
    Revenue
      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                 $   (3,111) $     (293) $   (3,404)
      Amortization and accretion          $   13,689  $    3,089  $   16,778
    -------------------------------------------------------------------------



    For the six months ended
     July 31, 2009                            Mining      Retail       Total
    -------------------------------------------------------------------------
    Revenue
      Canada                              $  103,631  $        -  $  103,631
      United States                                -      33,810      33,810
      Europe                                       -      37,013      37,013
      Asia                                         -      29,965      29,965
    Cost of sales                             97,305      52,933     150,238
    -------------------------------------------------------------------------
    Gross margin                               6,326      47,855      54,181
    Gross margin (%)                            6.1%       47.5%       26.5%
    Selling, general and administrative
     expenses                                  9,685      58,444      68,129
    -------------------------------------------------------------------------
    Loss from operations                      (3,359)    (10,589)    (13,948)
    -------------------------------------------------------------------------
    Interest and financing expenses           (2,413)     (4,284)     (6,697)
    Other income                                 340          24         364
    Insurance settlement                           -       3,250       3,250
    Dilution loss                            (34,761)          -     (34,761)
    Foreign exchange gain (loss)             (32,596)      1,483     (31,113)
    -------------------------------------------------------------------------
    Segmented loss before income taxes    $  (72,789) $  (10,116) $  (82,905)
                                         ------------------------------------
                                         ------------------------------------
    Segmented assets as at July 31, 2009
      Canada                              $  995,011  $        -  $  995,011
      United States                                -     365,424     365,424
      Other foreign countries                 13,899     158,684     172,583
    -------------------------------------------------------------------------
                                          $1,008,910  $  524,108  $1,533,018
    -------------------------------------------------------------------------
    Capital expenditures                  $   36,802  $    1,567  $   38,369
    OTHER SIGNIFICANT NON-CASH ITEMS:
      Income tax recovery                 $   (4,853) $   (5,123) $   (9,976)
      Amortization and accretion          $   28,333  $    6,313  $   34,646
    -------------------------------------------------------------------------

    Sales to three significant customers in the mining segment totalled
    $47.9 million for the six months ended July 31, 2009 ($21.3 million for
    the six months ended July 31, 2008 for the same three significant
    customers).



    For the six months ended
     July 31, 2008                            Mining      Retail       Total
    -------------------------------------------------------------------------
    Revenue
      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                 $   (9,739) $   (1,829) $  (11,568)
      Amortization and accretion          $   24,428  $    6,305  $   30,733
    -------------------------------------------------------------------------

    
    %SEDAR: 00003786E




For further information:

For further information: For investor information, visit
http://investor.harrywinston.com or call Investor Relations on (416) 362-2237
ext 290

Organization Profile

Dominion Diamond Corporation

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