Harry Winston Diamond Corporation Announces Third Quarter Fiscal 2008 Results



    
    -  Third Quarter Sales Increased 22% to $176.5 million
    -  Third Quarter Earnings from Operations Increased 79% to $66.3 million
    

    TORONTO, Dec. 12 /CNW/ - Harry Winston Diamond Corporation (TSX: HW,
NYSE:   HWD) today reported consolidated earnings from operations of
$66.3 million for the third quarter of Fiscal 2008, a 79% increase over the
prior year's comparable period. The operating earnings growth was driven by a
22% increase in sales to $176.5 million and a 44% increase in gross margin to
$101.9 million.
    Strong operating results were offset by a $40.6 million foreign exchange
loss, or $0.70 per share, primarily resulting from the revaluation of future
income taxes. During the third quarter that ended October 31, 2007, the
Canadian dollar, relative to the U.S. dollar, strengthened to $1.06,
representing a 13% increase over the second quarter. As a result, the Company
posted a net loss of $7.4 million or $(0.13) per share compared to net
earnings of $18.8 million, or $0.32 per share, in the prior year's period.
Excluding the impact of the foreign exchange loss for the third quarter, net
earnings would have been $33.2 million, or $0.57 per share.
    Rio Tinto Plc, the operator of the Diavik Diamond Mine, has approved a
two-year capital programme to complete the development of an underground mine
which secures the future of the Diavik Project beyond 2020. With this new
development plan in hand, Harry Winston is well advanced in extending its
existing debt facilities which, together with cash flow from operations, will
fund Harry Winston's estimated additional $218 million contribution to
complete this project having already contributed $77 million over the last
year. To ensure prudent fiscal management it is the intention of the Board of
Directors to continue to pay dividends of $0.05 per quarter during the
construction period. The Board of Directors has, therefore, declared a
dividend of $0.05 per share to be paid on January 21, 2008 to shareholders of
record on December 28, 2007.

    
    Third Quarter Fiscal 2008 Financial Highlights
    (US$ in millions except Earnings per Share amounts)

    -------------------------------------------------------------------------
                                         Three     Three      Nine     Nine
                                         months    months    months   months
                                         ended     ended     ended    ended
                                        Oct. 31,  Oct. 31,  Oct. 31, Oct. 31,
                                          2007      2006      2007     2006
    -------------------------------------------------------------------------
    Sales                                176.5     145.2     491.1     404.5
                                     ----------------------------------------
    Earnings from operations              66.3      37.1     158.6     109.6
                                     ----------------------------------------
    Net earnings (loss)                   (7.4)     18.8      16.0      77.0
                                     ----------------------------------------
    Earnings (loss) per share
     (diluted)                          $(0.13)    $0.32     $0.27     $1.30
                                     ----------------------------------------
    Currency exchange loss               (40.6)     (1.6)    (65.7)     (1.0)
                                     ----------------------------------------
    Currency exchange loss per share    $(0.70)   $(0.03)   $(1.12)   $(0.02)
    -------------------------------------------------------------------------
    

    "I am pleased with the record quarterly and year-to-date sales and strong
earnings from operations. Harry Winston Diamond Corporation's 79% increase in
operational results underscores the importance of our unique marketing
position as a pure diamond company. As the diamond production from the Diavik
Mine increases, we are poised to take advantage of the growing global demand
against a backdrop of diminishing world diamond supply," said Robert
Gannicott, Chairman and Chief Executive Officer. "In addition, our Harry
Winston retail business, with an expanding worldwide network of salons,
continues to focus on long-term growth and profits."
    Thomas J. O'Neill, President of Harry Winston Diamond Corporation and
Chief Executive Officer of Harry Winston Inc., added, "During the quarter, we
continued to focus on a calibrated growth strategy and to strengthen our core
business. Although we faced a more challenging U.S. environment, we were
pleased with our momentum in Asia and Europe for Harry Winston jewelry and
watches. We continue to see an increasing demand for our designed and
hand-crafted diamond jewelry and watches in our salons and in our select
wholesale watch network worldwide."
    Alice Murphy, Chief Financial Officer, said "Although our foreign
exchange loss is substantially non-cash, the strengthening of the Canadian
dollar throughout the year has dramatically impacted our year-to-date net
earnings and entirely masked our strong third quarter operational results.
Currently, the foreign exchange rate is close to parity which would support a
currency gain in the fourth quarter should this rate continue to January 31,
2008 year end."

    Mining Segment Results

    Mining revenues, representing production and sales of rough diamonds,
increased 35% or $32 million, to $122.7 million in the third quarter. The
Company held three primary rough diamond sales in the third quarter and two
primary sales in the comparable quarter of the prior year. In addition, as the
Company continues to expand its rough diamond sales network, sales are now
conducted throughout the quarter in selling offices in Belgium, Israel and
India.
    Mining earnings from operations were $70.0 million, representing a 72%
increase, or $29.4 million, from the prior year comparable quarter. Additional
highlights of the Harry Winston Diamond Corporation's 40% share of the Diavik
Mine production include:

    (Reported on a one-month lag)

    
    -------------------------------------------------------------------------
                                        Three     Three      Nine      Nine
                                        months    months    months    months
                                        ended     ended     ended     ended
                                      September September September September
                                       30, 2007  30, 2006  30, 2007  30, 2006
    -------------------------------------------------------------------------
    Diamond recovered (000s carats)      1,249     1,132     3,600     2,934
    -------------------------------------------------------------------------
    Grade (carats/tonne)                  4.75      3.92      4.95      4.02
    -------------------------------------------------------------------------
    Operating costs, cash
     ($US millions)                       28.2      26.4      79.7      71.1
    -------------------------------------------------------------------------
    Operating costs per carat,
     cash ($US)                             23        23        22        24
    -------------------------------------------------------------------------
    


    Retail Segment Results

    Harry Winston's retail segment reported sales of $53.8 million compared
to $54.5 million for the comparable quarter of the prior year, or relatively
flat to last year. International sales increased 16%, or $4.8 million, to
$34.4 million in the third quarter as a result of increases in existing store
sales and sales from three new salons that helped offset the effects of a
robbery at the Paris Salon. U.S. third quarter sales decreased 22%, or
$5.5 million, from $24.9 million to $19.4 million primarily due to the effect
of volatility in the U.S. financial markets. As a result, the segment reported
a loss from operations of $3.6 million compared to a loss of $3.5 million in
the prior year. In addition, included in last year's quarterly results was a
$6.3 million adjustment for stock compensation triggered by the acquisition of
the remaining portion of the Harry Winston Inc. operations.
    At the end of the third quarter, the Company operated 16 salons compared
to 12 salons in the prior year. In addition, during the third quarter the
Company opened a new watch manufacturing facility in Geneva, Switzerland to
support increased capacity for the growing timepiece business.

    Web cast

    As previously announced, Harry Winston Diamond Corporation will host a
webcast on Thursday, December 13th beginning at 9:00 AM (EST) to review these
results and its outlook. Interested parties may listen to a broadcast on the
Company's website at investor.harrywinston.com. An online archive of the
webcast will be available on the Company's website later the same day. Harry
Winston Diamond Corporation's unaudited consolidated interim financial
statements together with Management's Discussion and Analysis are available on
the Company's web site and on SEDAR (www.sedar.com).
    Information in this news release that is not current or historical
factual information may constitute forward-looking information or statements
within the meaning of applicable securities laws. Implicit in this
information, particularly in respect of statements as to future operating
results and economic performance of Harry Winston Diamond Corporation, and
capital commitments at the Diavik Mine, are assumptions regarding projected
revenue and expense, diamond prices, mining and mine construction and
development costs and the Canadian/US dollar exchange rate. Specifically, in
estimating Harry Winston Diamond Corporation's share of the Diavik Mine
capital expenditure requirements, Harry Winston Diamond Corporation has used a
Canadian/US dollar exchange rate of $1.00, and has assumed that construction
will continue on schedule and without undue disruption with respect to current
underground mining construction initiatives. These assumptions, although
considered reasonable by Harry Winston Diamond Corporation at the time of
preparation, may prove to be incorrect. Forward-looking information is subject
to certain factors, including risks and uncertainties, which could cause
actual results to differ materially from what we currently expect. These
factors include, among other things, the uncertain nature of mining and mine
development activities, risks associated with underground construction
activities, risks associated with joint venture operations, risks associated
with the remote location of the Diavik Mine site, risks associated with
regulatory and financing requirements, fluctuations in diamond prices, changes
in world economic conditions and the risk of continued fluctuations in the
Canadian/US dollar exchange rate.

    About Harry Winston Diamond Corporation

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


    
                                 Highlights

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

    The Company achieved record consolidated sales for the second consecutive
quarter, generating a 44% increase in gross margin and a 79% increase in
consolidated earnings from operations over the comparable quarter of the prior
year. Consolidated quarterly sales totalled $176.5 million with earnings from
operations of $66.3 million compared to $145.2 million and $37.1 million,
respectively, for the comparable quarter of the prior year.
    Net earnings results for the quarter include the negative effects of a
net $40.6 million foreign exchange loss, or $0.70 per share, compared to a
$1.6 million foreign exchange loss, or $0.03 per share, in the comparable
quarter of the prior year. The loss is a result of the 13% strengthening of
the Canadian dollar relative to the US dollar during the quarter, which ended
October 31, 2007. This loss relates principally to the revaluation of the
Company's Canadian dollar denominated long-term future income tax liability.
Foreign exchange charges from the revaluation of the Canadian tax liability
are not tax deductible, resulting in a quarterly income tax provision of
$26.2 million against earnings before income taxes of $18.9 million.
Consequently, a net loss of $7.4 million, or $0.13 per share, was incurred in
the quarter compared to prior year net earnings of $18.8 million, or $0.32 per
share.
    The improvement in consolidated sales and earnings from operations was
driven by the mining segment, which posted a 35% quarterly increase in sales
to $122.7 million, and a 72% increase in earnings from operations to
$70.0 million, compared to the same quarter of the prior year. Diamond
production at the Diavik Mine, which is recorded on a quarterly calendar
basis, increased by 10% to 1.25 million carats for the three months ended
September 30, 2007, from 1.13 million carats for the comparable period of the
prior year.
    Third quarter sales of $53.8 million and a loss from operations of
$3.6 million for Harry Winston's retail segment were marginally weaker than
the comparable quarter of last year, primarily due to the effect of volatility
in the US financial markets and the business disruption resulting from a
significant robbery at the Paris salon. The Company was fully insured for the
inventory loss and expects to record a pre-tax gain of approximately
$13 million in the fourth quarter reflecting the anticipated settlement of the
insurance claim.
    Rio Tinto Plc, the operator of the Diavik Diamond Mine, has approved a
two-year capital program to complete the development of an underground mine
which secures the future of the Diavik Project beyond 2020. With this new
development plan in hand, Harry Winston is well advanced in extending its
existing debt facilities which, together with cash flow from operations, will
fund Harry Winston's estimated additional $218 million contribution to
complete this project having already contributed $77 million over the last
year. To ensure prudent fiscal management it is the intention of the Board of
Directors to continue to pay dividends of $0.05 per quarter during the
construction period. The Board of Directors has, therefore, declared a
dividend of $0.05 per share to be paid on January 21, 2008 to shareholders of
record on December 28, 2007.

    
                    Management's Discussion and Analysis
    (all figures are in United States dollars unless otherwise indicated)
                      Prepared as of December 12, 2007
    

    On November 9, 2007, Aber Diamond Corporation changed its name to Harry
Winston Diamond Corporation.
    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 nine months ended
October 31, 2007, and its financial position as at October 31, 2007. 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 nine months ended
October 31, 2007 and the audited consolidated financial statements of the
Company and notes thereto for the year ended January 31, 2007. Unless
otherwise specified, all financial information is presented in United States
dollars. Unless otherwise indicated, all references to "third quarter" refer
to the three months ended October 31, 2007. Unless otherwise indicated,
references to "international" for the retail segment refer to Europe and Asia.
    Certain comparative figures have been reclassified to 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 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 projected capital
expenditure requirements, the operation of the Geneva watch factory, estimated
reserves and resources at, and production from, the Diavik Mine in 2007,
potential improvements in grade and tonnage at the Diavik Mine, the expected
life of the Diavik Mine, the timing of a revised resource statement, plans,
timelines and targets for construction, mining, development, production and
exploration activities at the Diavik Mine, future mining and processing at the
Diavik Mine, the number and timing of expected rough diamond sales, projected
sales growth and new store openings at Harry Winston, expected gross margin
and expense trends in the retail segment, expected diamond prices and
expectations concerning the diamond industry.
    Forward-looking information is based on certain factors and assumptions
regarding, among other things, mining, production, construction and
exploration activities at the Diavik Mine, world and US economic conditions,
and the level of worldwide diamond production, the expected sales mix at Harry
Winston's retail segment, expected salon openings and potential improvements
in sourcing and purchasing polished diamonds. Specifically, in estimating
Harry Winston Diamond Corporation's projected share of the Diavik Mine capital
expenditure requirements, Harry Winston Diamond Corporation has used a
Canadian/US dollar exchange rate of $1.00, and has assumed that construction
will continue on schedule and without undue disruption with respect to current
underground mining construction initiatives. In making statements regarding
estimated production at the Diavik Mine, potential improvements in grade and
tonnage at the Diavik Mine, future mining activity and mine plans and future
rough diamond sales, Harry Winston Diamond Corporation has assumed that mining
operations and exploration activities will proceed in the ordinary course
according to schedule and consistent with past results.
    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 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, risks relating to the Company's salon expansion strategy and
the risks of competition in the luxury jewelry segment. Please see page 21 of
this interim report, as well as the Company's annual report, available at
www.sedar.com, for a more comprehensive discussion of these and other risks
and uncertainties involved in Harry Winston Diamond Corporation's operations.
    You should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While Harry
Winston Diamond Corporation may elect to, it is under no obligation and does
not undertake to update this information at any particular time, except as
required by law.

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

    Summary Discussion

    Prior to November 9, 2007, Harry Winston Diamond Corporation was known as
Aber Diamond Corporation. The name change reflects the rebranding of the
Company and its international position as a premier diamond company.
    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 (the "Diavik
Mine"), located off Lac de Gras in Canada's Northwest Territories. Harry
Winston Diamond Corporation also owns a 100% interest in Harry Winston Inc.,
the premier fine jewelry and watch retailer. Harry Winston Diamond
Corporation's mission is to deliver shareholder value through the enhanced
earning power and longevity of the Diavik Mine asset as the cornerstone of a
profitable synergy with the Harry Winston brand. In a changing diamond
market-place, Harry Winston Diamond Corporation has charted a unique course to
continue to build shareholder value.
    The Company's most significant asset is a 40% interest in the Diavik
group of mineral claims. The Diavik Joint Venture (the "Joint Venture") is an
unincorporated joint arrangement between Diavik Diamond Mines Inc. ("DDMI" -
60%) and Harry Winston Diamond Mines Ltd. (formerly Aber Diamond Mines Ltd.)
(40%) where Harry Winston Diamond Corporation owns an undivided 40% interest
in the assets, liabilities and expenses. DDMI is the operator of the Diavik
Mine. Both companies are headquartered in Yellowknife, Canada. DDMI is a
wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston
Diamond Mines Ltd. is a wholly owned subsidiary of Harry Winston Diamond
Corporation of Toronto, Canada. The name of Aber Diamond Mines Ltd. was
changed to Harry Winston Diamond Mines Ltd. on December 3, 2007.

    Market Commentary

    The Diamond Market
    During the third quarter, demand for rough diamonds continued to increase
across all ranges, leading to higher rough diamond prices.
    Steady demand for polished diamonds in the US market and continued growth
from Asia supported higher polished diamond prices. This was particularly
evident in the better quality white goods, three carats and above. Strong
demand in these ranges is expected to lead to further price increases before
the end of the year.

    The Retail Jewelry Market
    Sales in the luxury retail jewelry and watch sector were generally robust
worldwide despite the volatility in the US financial markets.

    Consolidated Financial Results

    The following is a summary of the Company's consolidated quarterly
results for the eight quarters ended October 31, 2007 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)(unaudited)


                                                    2008      2008      2008
                                                      Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                                       $176,478  $173,269  $141,365
    Cost of sales                                 74,591    81,827    71,132
    -------------------------------------------------------------------------
    Gross margin                                 101,887    91,442    70,233
    Gross margin (%)                               57.7%     52.8%     49.7%
    Selling, general and
     administrative expenses                      35,539    35,201    34,211
    -------------------------------------------------------------------------
    Earnings from operations                      66,348    56,241    36,022
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest and financing expenses               (7,422)   (7,222)   (6,132)
    Other income (expense)                           594       545       913
    Foreign exchange gain (loss)                 (40,584)  (11,785)  (13,292)
    -------------------------------------------------------------------------
    Earnings before income taxes                  18,936    37,779    17,511
    Income taxes                                  26,197    17,747    14,118
    -------------------------------------------------------------------------
    Earnings (loss) before minority
     interest                                     (7,261)   20,032     3,393
    Minority interest                                 90       (26)      140
    -------------------------------------------------------------------------
    Net earnings (loss)                         $ (7,351) $ 20,058  $  3,253
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss) per share             $  (0.13) $   0.34  $   0.06
    Diluted earnings (loss) per share           $  (0.13) $   0.33  $   0.05
    Cash dividends declared per share           $   0.25  $   0.25  $   0.25
    Total assets(i)                             $  1,433  $  1,367  $  1,315
    Total long-term liabilities(i)              $    530  $    486  $    408
    -------------------------------------------------------------------------


                                          2007      2007      2007      2007
                                            Q4        Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                             $154,328  $145,232  $139,962  $119,271
    Cost of sales                       78,559    74,636    68,458    63,845
    -------------------------------------------------------------------------
    Gross margin                        75,769    70,596    71,504    55,426
    Gross margin (%)                     49.1%     48.6%     51.1%     46.5%
    Selling, general and
     administrative expenses            38,590    33,480    27,171    27,295
    -------------------------------------------------------------------------
    Earnings from operations            37,179    37,116    44,333    28,131
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest and financing expenses     (6,441)   (5,570)   (4,805)   (4,334)
    Other income (expense)                (111)    1,764     1,805     1,623
    Foreign exchange gain (loss)         9,831    (1,560)    2,619    (2,106)
    -------------------------------------------------------------------------
    Earnings before income taxes        40,458    31,750    43,952    23,314
    Income taxes                        13,169    13,005     9,692    (1,036)
    -------------------------------------------------------------------------
    Earnings (loss) before minority
     interest                           27,289    18,745    34,260    24,350
    Minority interest                       (5)      (86)       (5)      471
    -------------------------------------------------------------------------
    Net earnings (loss)               $ 27,294  $ 18,831  $ 34,265  $ 23,879
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss) per share   $   0.47  $   0.32  $   0.59  $   0.41
    Diluted earnings (loss) per share $   0.46  $   0.32  $   0.58  $   0.40
    Cash dividends declared per share $   0.25  $   0.25  $   0.25  $   0.25
    Total assets(i)                   $  1,288  $  1,246  $  1,116  $  1,111
    Total long-term liabilities(i)    $    536  $    530  $    460  $    460
    -------------------------------------------------------------------------


                                                              Nine      Nine
                                                            Months    Months
                                                             Ended     Ended
                                                    2006   Oct. 31,  Oct. 31,
                                                      Q4      2007      2006
    -------------------------------------------------------------------------
    Sales                                       $125,891  $491,112  $404,465
    Cost of sales                                 52,782   227,550   206,939
    -------------------------------------------------------------------------
    Gross margin                                  73,109   263,562   197,526
    Gross margin (%)                               58.1%     53.7%     48.8%
    Selling, general and
     administrative expenses                      36,654   104,951    87,944
    -------------------------------------------------------------------------
    Earnings from operations                      36,455   158,611   109,582
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Interest and financing expenses               (4,511)  (20,776)  (14,709)
    Other income (expense)                         1,767     2,052     5,191
    Foreign exchange gain (loss)                  (5,392)  (65,661)   (1,049)
    -------------------------------------------------------------------------
    Earnings before income taxes                  28,319    74,226    99,015
    Income taxes                                  10,534    58,062    21,662
    -------------------------------------------------------------------------
    Earnings (loss) before minority
     interest                                     17,785    16,164    77,353
    Minority interest                              2,876       204       379
    -------------------------------------------------------------------------
    Net earnings (loss)                         $ 14,909  $ 15,960  $ 76,974
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings (loss) per share             $   0.26  $   0.27  $   1.32
    Diluted earnings (loss) per share           $   0.27  $   0.27  $   1.30
    Cash dividends declared per share           $   0.25  $   0.75  $   0.75
    Total assets(i)                             $  1,044  $  1,433  $  1,246
    Total long-term liabilities(i)              $    434  $    530  $    530
    -------------------------------------------------------------------------
    (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
Mine, the number of primary and secondary sales events conducted at each sales
location during the quarter, and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Mine in each quarter. The quarterly
results for the retail segment are also seasonal, with generally higher sales
during the fourth quarter due to the holiday season.

    Three Months Ended October 31, 2007
    Compared to Three Months Ended October 31, 2006

    Consolidated Net Earnings

    The third quarter consolidated net loss of $7.4 million or $0.13 per
share compares to net earnings of $18.8 million or $0.32 per share in the
prior period last year. This reduction in net earnings is substantially due to
a $40.6 million foreign exchange loss related principally to an unrealized
 non-cash cost on future income taxes payable, as discussed under
"Consolidated Income Taxes" below, as compared to a foreign exchange loss of
$1.6 million in the comparable period last year. The comparable quarter of the
prior year included a $6.3 million adjustment for stock compensation triggered
by the acquisition of the remaining portion of the Harry Winston Inc. retail
operations.

    Consolidated Revenue

    Revenue for the third quarter totalled $176.5 million, representing a 22%
increase over the comparable quarter last year of $145.2 million. On a segment
basis, rough diamond sales were $122.7 million and sales from Harry Winston's
retail salons were $53.8 million as compared to $90.8 million and
$54.5 million, respectively, for the comparable quarter of the prior year.
Retail segment sales for the quarter were marginally lower than the comparable
quarter of last year, reflecting the effect of volatility in the US financial
markets and a significant robbery at the Paris salon. Ongoing quarterly
variations in revenues are inherent in Harry Winston Diamond Corporation's
business, resulting from the seasonality of the mining and retail activities
as well as from the variability of the rough diamond sales schedule.

    Consolidated Cost of Sales and Gross Margin

    The Company's third quarter cost of sales was $74.6 million consistent
with the comparable quarter of the prior year, however gross margin increased
significantly to 57.7% from 48.6% as a result of strong mining segment sales.
The Company's cost of sales includes cash and non-cash costs associated with
mining, sorting and retail sales activities. See "Segmented Analysis" on page
11 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 (including salon
personnel), advertising, professional fees, rent and building related costs.
SG&A expenses for the third quarter were $35.5 million as compared to
$33.5 million for the comparable quarter of the prior year. The increase in
SG&A expenses relates to both the mining segment and the retail segment. For
the mining segment, the increase was as a result of the continued development
of our global selling, marketing and administrative operations. For the retail
segment the increase was as a result of our expanded salon retail base, and
reflected an increase in salaries and benefits, rent and building related
expenses and depreciation and amortization expense. The comparable quarter of
the prior year for the retail segment included a $6.3 million stock
compensation charge triggered by the acquisition of the remaining portion of
the Harry Winston Inc. retail operations. See "Segmented Analysis" on page 11
for additional information.

    Consolidated Income Taxes

    Harry Winston Diamond Corporation recorded a tax expense of $26.2 million
during the third quarter of fiscal 2008, compared to a tax expense of
$13.0 million in the comparable quarter of the previous year.
    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 third quarter of fiscal 2008, the Canadian dollar
strengthened by 13% relative to the US dollar during the quarter. As a result,
the Company recorded a foreign exchange loss of $40.6 million, of which
$31.4 million was unrealized and resulted from the revaluation of the
Company's Canadian dollar denominated future income tax liability. This
foreign exchange loss is not deductible for Canadian income tax purposes, as
the loss does not exist when calculating the income of the Company in Canadian
dollars, which is the basis of income tax expense computation.
    Because of the significant non-deductible unrealized non-cash foreign
exchange loss incurred during the third quarter, the Company's effective
income tax rate for the quarter is substantially inflated. The foreign
exchange loss resulted in a considerably lower net income before tax in US
dollars relative to the net income before tax in the currency of the country
of origin in which income tax expense is calculated. Consequently, all
reconciliation items, when presented as a percentage of the US dollar net
income, become much higher in the current quarter. For the third quarter of
fiscal 2008, the Company's effective income tax rate is 138%. The impact of
foreign exchange accounted for 69% of the overall effective tax rate for the
third quarter. The Northwest Territories mining royalty in the current
quarter, as a percentage of the US dollar net income, is also much higher as
the royalty is computed based on income in Canadian dollars.
    The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
    The Company has provided a table below summarizing the movement from the
statutory to the effective income tax rate as a percentage of earnings before
taxes:

    
                                                             Three     Three
                                                            Months    Months
                                                             Ended     Ended
                                                           Oct. 31,  Oct. 31,
                                                              2007      2006
    -------------------------------------------------------------------------
    Statutory income tax rate                                   34%       37%
    Stock compensation                                           2%        1%
    Northwest Territories mining royalty (net of
     income tax relief)                                         33%       12%
    Impact of foreign exchange                                  69%      (4)%
    Earnings subject to tax different than statutory rate     (15)%      (4)%
    Changes in valuation allowance                              10%        2%
    Other items                                                  5%      (3)%
    Effective income tax rate                                  138%       41%
    -------------------------------------------------------------------------
    

    Consolidated Interest and Financing Expenses

    Interest and financing expenses of $7.4 million were incurred during the
third quarter compared to $5.6 million during the comparable quarter of the
prior year. The increase in interest and financing expenses is mainly due to
higher debt levels at Harry Winston's retail segment to finance increased
inventory levels and salon openings.

    Consolidated Other Income

    Other income, which includes interest income on the Company's various
bank balances, was $0.6 million during the third quarter compared to
$1.8 million in the comparable quarter of the prior year. The reduction in
other income is due to higher cash balances held in the comparable quarter of
the prior year in advance of the Harry Winston Inc. acquisition.
    In October 2007, approximately $23.2 million in Company-owned retail
inventory at cost was stolen during a robbery at the Harry Winston Paris
salon, and charged to other income during the quarter. The Company is fully
insured against the loss, and has offset the inventory write-off by setting up
a receivable of equal value in respect of the insurance proceeds. The
insurance claim is subject to investigation by the insurance company and is
scheduled to be concluded during the fourth quarter of fiscal 2008, at which
time the claim will be settled. The insurance settlement is expected to result
in the recording of a gain in the fourth quarter of approximately $13 million
pre-tax in retail segment other income, representing the difference between
the cost of the inventory stolen and the insurance proceeds received.

    Consolidated Foreign Exchange Loss

    A foreign exchange loss of $40.6 million was recognized during the third
quarter compared to a loss of $1.6 million in the comparable quarter of the
prior year. The current quarter loss is comprised of a realized foreign
exchange gain of $1.0 million and an unrealized, non-cash loss of
$41.6 million relating principally to the revaluation of the Company's
Canadian dollar denominated long-term future income tax liability stemming
from the strengthening of the Canadian dollar against the US dollar at quarter
end. Harry Winston Diamond Corporation's ongoing currency exposure relates
primarily to expenses and obligations incurred in Canadian dollars, as well as
to the revaluation of certain Canadian monetary balance sheet amounts. The
Company does not currently have any significant derivative instruments
outstanding.

    Nine Months Ended October 31, 2007 Compared to Nine Months Ended
    October 31, 2006

    Consolidated Net Earnings

    Net earnings for the nine months ended October 31, 2007 of $16.0 million
or $0.27 per share compares to $77.0 million or $1.32 per share for the nine
months ended October 31, 2006. This reduction in net earnings is substantially
due to a significant foreign exchange loss of $65.7 million related
principally to an unrealized non-cash cost on future income taxes payable as
compared to a foreign exchange loss of $1.0 million in the comparable
year-to-date period last year. The comparable nine-month period of the prior
year included a $6.3 million adjustment to stock compensation triggered by the
acquisition of the remaining portion of the Harry Winston Inc. retail
operations. In addition, the comparable year-to-date period included a future
income tax recovery of $17.0 million attributable to reductions in future
income tax rates.

    Consolidated Revenue

    Revenue for the nine months ended October 31, 2007 was $491.1 million,
representing an increase of 21% over revenue of $404.5 million for the nine
months ended October 31, 2006. Rough diamond sales accounted for
$310.5 million of this revenue compared to $251.5 million for the comparable
period of the prior year. Retail segment sales of $180.6 million accounted for
the balance, compared to $152.9 million for the comparable period of the prior
year. Year-to-date sales performance for the retail segment was negatively
impacted by certain third quarter events, namely the effect of volatility in
the US financial markets and the impact of the Paris salon robbery.

    Consolidated Cost of Sales and Gross Margin

    The Company recorded cost of sales of $227.6 million during the nine
months ended October 31, 2007 compared to $206.9 million during the nine
months of the prior year, and gross margin increased significantly to 53.7%
from 48.8% as a result of strong year-to-date mining segment sales. The
Company's cost of sales includes cash and non-cash costs associated with
mining, sorting and retail sales activities.

    Consolidated Selling, General and Administrative Expenses

    Harry Winston Diamond Corporation incurred SG&A expenses of
$105.0 million for the nine months ended October 31, 2007, compared to
$87.9 million for the nine months ended October 31, 2006. SG&A expenses for
the current nine months included $17.7 million for the mining segment and
$87.3 million for the retail segment as compared to $13.8 million and
$74.1 million, respectively, for the comparable nine-month period of the prior
year. The principal components of SG&A expenses are salaries (including salon
personnel), advertising, professional fees, rent, and related office costs.
    The increase in SG&A expenses was primarily a result of Harry Winston's
retail expansion strategy, which included the opening of additional salons,
and the growing international presence of our mining sales segment. The
increase of $17.1 million in SG&A expenses from the comparable period of the
prior year included an increase of $4.5 million in advertising and selling
expenses, $4.1 million in rent and building related expenses, and $2.9 million
in amortization expense. Included in the comparable nine-month period of the
prior year was a $6.3 million adjustment to stock compensation triggered by
the acquisition of the remaining portion of the Harry Winston Inc. operations,
which was partially offset by the reversal of a specific provision against
accounts receivable of $2.2 million.

    Consolidated Income Taxes

    The Company recorded a tax expense of $58.1 million during the nine
months ended October 31, 2007, compared to $21.7 million for the comparable
period of the prior year. The Company's effective income tax rate for the nine
months ended October 31, 2007 was 78%, which was based on a statutory income
tax rate of 34% adjusted for the Northwest Territories mining royalty, items
that are not deductible for income tax purposes, impact of foreign exchange,
earnings subject to tax different than the statutory income tax rate, and
impact of changes in future income tax rates. During the nine months ended
October 31, 2007, the Company recorded a future tax recovery of $0.9 million
as a result of the decrease in the Federal corporate income tax rates
commencing January 1, 2011, which was substantively enacted during the period.
This compares with a future tax recovery of $17.0 million recorded in the
comparable period of the prior year, which resulted from the decrease in
Northwest Territories and Federal corporate income tax rates and the
elimination of Federal surtax.
    During the nine months ended October 31, 2007, the Company recorded an
unrealized non-cash foreign exchange loss of $54.7 million on the revaluation
of the Canadian dollar denominated future income tax liability, which is not
deductible for Canadian income tax purposes. The significant unrealized
foreign exchange loss is the primary reason for the increase of the overall
effective income tax rate in the current period.
    The rate of income tax payable by Harry Winston Inc. varies by
jurisdiction. Net operating losses are available in certain jurisdictions to
offset future income taxes payable in such jurisdictions. The net operating
losses are scheduled to expire through 2027.
    The Company has provided a table below summarizing the movement from the
Company's statutory to the effective income tax rate as a percentage of
earnings before taxes:

    
                                                              Nine      Nine
                                                            Months    Months
                                                             Ended     Ended
                                                           Oct. 31,  Oct. 31,
                                                              2007      2006
    -------------------------------------------------------------------------
    Statutory income tax rate                                   34%       37%
    Stock compensation                                           0%        1%
    Northwest Territories mining royalty (net of income
     tax relief)                                                18%        9%
    Impact of change in future income tax rate                 (1)%     (17)%
    Impact of foreign exchange                                  27%      (3)%
    Earnings subject to tax different than statutory rate      (6)%      (4)%
    Changes in valuation allowance                               1%        0%
    Benefits of losses recognized as reduction of goodwill       2%        0%
    Other items                                                  3%      (1)%
    Effective income tax rate                                   78%       22%
    -------------------------------------------------------------------------
    


    Consolidated Interest and Financing Expenses

    Interest and financing expenses of $20.8 million were incurred during the
nine months ended October 31, 2007 compared to $14.7 million for the
comparable period of the preceding year. The increase in interest and
financing expenses is due to a combination of higher debt levels at Harry
Winston's retail segment to finance increased inventory levels and salon
openings, an increased drawdown of Harry Winston Diamond Corporation's
expanded credit facility related to the Harry Winston Inc. retail acquisition,
and higher interest rates.

    Consolidated Other Income

    Other income, which includes interest income on the Company's various
bank balances, was $2.1 million during the nine months ended October 31, 2007
compared to $5.2 million for the comparable period of the preceding year. The
reduction in income is due to higher cash balances held in the comparable
period of the prior year in advance of the Harry Winston Inc. acquisition.

    Consolidated Foreign Exchange Gain (Loss)

    A foreign exchange loss of $65.7 million was recognized during the nine
months ended October 31, 2007 compared with a loss of $1.0 million recorded
during the nine months ended October 31, 2006. The current year-to-date loss
is comprised of a realized foreign exchange gain of $0.8 million and an
unrealized, non-cash loss of $66.5 million relating 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 quarter end. The Company's ongoing currency exposure
relates primarily to expenses and obligations incurred in Canadian dollars, as
well as the revaluation of certain Canadian monetary balance sheet amounts.
The Company does not currently have any significant derivative instruments
outstanding.

    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) (unaudited)

                                                    2008      2008      2008
                                                      Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                                       $122,711  $105,071  $ 82,752
    Cost of sales                                 45,985    46,217    40,516
    -------------------------------------------------------------------------
    Gross margin                                  76,726    58,854    42,236
    Gross margin (%)                               62.5%     56.0%     51.0%
    Selling, general and
     administrative expenses                       6,748     5,861     5,087
    -------------------------------------------------------------------------
    Earnings from operations                    $ 69,978  $ 52,993  $ 37,149
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                          2007      2007      2007      2007
                                            Q4        Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                             $ 81,035  $ 90,754  $ 91,476  $ 69,308
    Cost of sales                       39,413    45,461    43,256    38,749
    -------------------------------------------------------------------------
    Gross margin                        41,622    45,293    48,220    30,559
    Gross margin (%)                     51.4%     49.9%     52.7%     44.1%
    Selling, general and
     administrative expenses             7,397     4,665     4,373     4,787
    -------------------------------------------------------------------------
    Earnings from operations          $ 34,225  $ 40,628  $ 43,847  $ 25,772
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                              Nine      Nine
                                                            Months    Months
                                                             Ended     Ended
                                                    2006   Oct. 31,  Oct. 31,
                                                      Q4      2007      2006
    -------------------------------------------------------------------------
    Sales                                       $ 62,528  $310,534  $251,538
    Cost of sales                                 22,780   132,718   127,466
    -------------------------------------------------------------------------
    Gross margin                                  39,748   177,816   124,072
    Gross margin (%)                               63.6%     57.3%     49.3%
    Selling, general and
     administrative expenses                       8,221    17,696    13,824
    -------------------------------------------------------------------------
    Earnings from operations                    $ 31,527  $160,120  $110,248
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Three Months Ended October 31, 2007
    Compared to Three Months Ended October 31, 2006

    Mining Revenue

    Sales for the third quarter totalled $122.7 million compared to
$90.8 million in the comparable quarter of the prior year. The Company held
three primary rough diamond sales in the current quarter and two primary sales
in the comparable quarter of last year. With Harry Winston Diamond
Corporation's continued expansion of its global rough diamond sales network,
sales are now conducted throughout the quarter in each of the Company's three
selling offices located in Belgium, Israel and India. 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
Mine, the number of primary and secondary sales events conducted at each sales
location during the quarter, and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Mine in each quarter.

    Mining Cost of Sales and Gross Margin

    Cost of sales includes cash operating costs of $23.6 million, non-cash
operating costs of $20.0 million and private production royalties of
$2.4 million compared to $28.5 million, $15.3 million and $1.7 million,
respectively, in the same period of the prior year. A substantial portion of
cost of sales is mining operating costs, which are incurred at the Diavik
Mine. The third quarter of the prior year was negatively impacted by higher
cash operating costs incurred as a result of the early closure of the 2006
winter road. Cost of sales also includes sorting costs, which consist of Harry
Winston Diamond Corporation's cost of handling and sorting product in
preparation for sales to third parties. Non-cash costs include amortization
and depreciation, the majority of which is recorded using the unit-of-
production method over estimated proven and probable reserves. Private
production royalties are recorded based on actual production during each
accounting period.
    The third quarter gross margin was 62.5% compared to 49.9% in the
comparable quarter of the prior year. The increase in the gross margin
percentage is driven by higher carat production, reflecting both higher grade
and enhanced diamond recovery resulting from processing improvements. The
mining gross margin is anticipated to fluctuate between quarters, resulting
from variations in the specific mix of product sold during each quarter.

    Mining Selling, General and Administrative Expenses

    SG&A expenses for the mining segment increased $2.0 million to
$6.7 million from $4.7 million in the comparable quarter of the prior year
primarily due to the continued development of our global selling, marketing
and administrative operations.

    Nine Months Ended October 31, 2007 Compared to Nine Months Ended
    October 31, 2006

    Mining Revenue

    Sales for the nine months ended October 31, 2007 totalled $310.5 million
compared to $251.5 million for the nine months ended October 31, 2006. The
Company held eight primary diamond sales year-to-date and seven primary sales
in the comparable period of the prior year. With Harry Winston Diamond
Corporation's continued expansion of its global rough diamond sales network,
sales are now conducted throughout the quarter in each of the Company's three
selling offices located in Belgium, Israel and India. Harry Winston Diamond
Corporation expects that results for its mining segment will continue to
fluctuate depending on the seasonality of production at the Diavik Mine, the
number of primary and secondary sales events conducted at each sales location
during the quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Mine in each quarter.

    Mining Cost of Sales and Gross Margin

    Cost of sales includes cash operating costs of $76.1 million, non-cash
operating costs of $50.8 million and private production royalties of
$5.8 million compared to $84.5 million, $38.0 million and $5.0 million,
respectively, for the same nine-month period of the prior year. A substantial
portion of cost of sales is mining operating costs, which are incurred at the
Diavik Mine. Prior year cash operating costs were negatively impacted by
higher expenditures resulting from the early closure of the 2006 winter road.
Cost of sales also includes sorting costs, which consist of Harry Winston
Diamond Corporation's cost of handling and sorting product in preparation for
sales to third parties. Non-cash costs include amortization and depreciation,
the majority of which is recorded using the unit-of-production method over
estimated proven and probable reserves. Private production royalties are
recorded based on actual production during each accounting period.
    For the nine months ended October 31, 2007, gross margin was 57.3%
compared to 49.3% in the comparable period of the prior year. The increase in
the gross margin percentage is driven by higher carat production, reflecting
both higher grade and enhanced diamond recovery resulting from processing
improvements. The mining gross margin is anticipated to fluctuate during the
year, resulting from variations in the specific mix of product sold during the
period.

    Mining Selling, General and Administrative Expenses

    SG&A expenses for the mining segment increased by $3.9 million to
$17.7 million from $13.8 million in the comparable period of the prior year
primarily due to the continued development of our global selling, marketing
and administrative operations.

    Retail

    The retail segment includes sales from Harry Winston's 16 salons, which
are located in New York, Honolulu, Bal Harbour, Beverly Hills, Las Vegas,
Dallas, Paris, London, Geneva, Tokyo (Ginza, Omotesando and Roppongi), Osaka,
Taipei, Beijing and Hong Kong.

    
    (in thousands of United States dollars) (unaudited)

                                                    2008      2008      2008
                                                      Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                                       $ 53,767  $ 68,198  $ 58,613
    Cost of sales                                 28,606    35,610    30,616
    -------------------------------------------------------------------------
    Gross margin                                  25,161    32,588    27,997
    Gross margin (%)                               46.8%     47.8%     47.8%
    Selling, general and
     administrative expenses                      28,791    29,340    29,124
    -------------------------------------------------------------------------
    Earnings (loss) from operations             $ (3,630) $  3,248  $ (1,127)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                          2007      2007      2007      2007
                                            Q4        Q3        Q2        Q1
    -------------------------------------------------------------------------
    Sales                             $ 73,293  $ 54,478  $ 48,486  $ 49,963
    Cost of sales                       39,146    29,175    25,202    25,096
    -------------------------------------------------------------------------
    Gross margin                        34,147    25,303    23,284    24,867
    Gross margin (%)                     46.6%     46.4%     48.0%     49.8%
    Selling, general and
     administrative expenses            31,193    28,815    22,798    22,508
    -------------------------------------------------------------------------
    Earnings (loss) from operations   $  2,954  $ (3,512) $    486  $  2,359
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                              Nine      Nine
                                                            Months    Months
                                                             Ended     Ended
                                                    2006   Oct. 31,  Oct. 31,
                                                      Q4      2007      2006
    -------------------------------------------------------------------------
    Sales                                       $ 63,363  $180,578  $152,927
    Cost of sales                                 30,002    94,832    79,473
    -------------------------------------------------------------------------
    Gross margin                                  33,361    85,746    73,454
    Gross margin (%)                               52.7%     47.5%     48.0%
    Selling, general and
     administrative expenses                      28,433    87,255    74,120
    -------------------------------------------------------------------------
    Earnings (loss) from operations             $  4,928  $ (1,509) $   (666)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Three Months Ended October 31, 2007
    Compared to Three Months Ended October 31, 2006

    Retail Revenue

    Global sales for the third quarter were $53.8 million compared to
$54.5 million for the comparable quarter of the prior year. International
sales increased 16% to $34.4 million in the quarter as a result of existing
and new salon openings offsetting the effects of a robbery at the Paris salon
in October 2007. See "Consolidated Other Income" discussion on page 7 for
additional information. US sales decreased 22% from $24.9 million to
$19.4 million primarily due to the effect of volatility in the US financial
markets.

    Retail Cost of Sales and Gross Margin

    Cost of sales for the third quarter were $28.6 million compared to
$29.2 million for the comparable quarter of the prior year. Gross margin for
the quarter was $25.2 million and 46.8% compared to $25.3 million and 46.4%
for the third quarter of the prior year. Excluding the impact of sales of
Harry Winston Inc. pre-acquisition inventory, gross margin rate for the third
quarter and the comparable quarter of the prior year would have been 52.4% and
49.9%, respectively.

    Retail Selling, General and Administrative Expenses

    Third quarter SG&A expenses were flat at $28.8 million compared to the
same quarter of the prior year, which included a $6.3 million adjustment to
stock compensation triggered by the acquisition of the remaining portion of
the Harry Winston Inc. operations. The effective increase in SG&A expenses
during the quarter as compared to the same quarter of the prior year primarily
reflects an increase in salaries and benefits of $2.7 million, an increase in
rent and building related expenses of $2.0 million and an increase in
depreciation and amortization expense of $0.8 million, as a result of our
expanded salon retail base and continued commitment to global expansion. SG&A
expenses include depreciation and amortization expense of $2.1 million
compared to $1.4 million in the comparable quarter of the prior year.

    Nine Months Ended October 31, 2007 Compared to Nine Months Ended
    October 31, 2006

    Retail Revenue

    Sales for the nine months ended October 31, 2007 were $180.6 million
compared to $152.9 million for the nine months ended October 31, 2006. This
18% increase in retail sales was driven by a 3% increase in US sales from
$64.3 million to $65.9 million and a 29% increase in international sales from
$88.7 million to $114.7 million. Same store sales and contributions from new
salons during the first nine months were negatively impacted by the Paris
salon robbery in the third quarter.

    Retail Cost of Sales and Gross Margin

    Cost of sales for the nine months ended October 31, 2007 were
$94.8 million compared to $79.5 million for the nine months ended October 31,
2006. Year to date gross margin increased 17% to $85.7 million from
$73.5 million in the comparable period last year. For the first nine months of
fiscal 2008, gross margin percentage was 47.5% compared to 48.0% in the prior
year. The sale of certain inventory that was on hand at the date of
acquisition of Harry Winston Inc. was at a lower margin than normal. Adjusting
for the impact of this pre-acquisition inventory, gross margin as a percentage
of sales for the nine months year to date would have increased to
approximately 51.7% compared to 50.1% in the prior period.

    Retail Selling, General and Administrative Expenses

    SG&A expenses increased to $87.3 million for the nine months ended
October 31, 2007 as compared to $74.1 million in the comparable period of the
prior year as a result of the continued expansion of the retail salon network
consistent with the retail growth strategy. SG&A expenses reflect an increase
in salaries and benefits of $6.2 million, primarily attributable to new salon
personnel, an increase in advertising and selling expenses of $4.6 million, an
increase in rent and building related expenses of $4.0 million, and an
increase in depreciation and amortization expense of $2.3 million. Included in
the comparable nine-month period of the prior year was a $6.3 million
adjustment to stock compensation triggered by the acquisition of the remaining
portion of Harry Winston Inc. and a reversal of a specific provision against
accounts receivable of $2.2 million. SG&A expenses include depreciation and
amortization expense of $6.1 million compared to $3.8 million in the
comparable period of the prior year.

    Operational Update

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

    Mining Segment

    During the third calendar quarter of 2007, the Diavik Mine produced
3.12 million carats of diamonds from 0.66 million tonnes of ore representing a
10% increase in diamonds recovered in the calendar quarter over the comparable
period last year. For the calendar year to date, diamonds recovered increased
23% to 9.0 million carats over the prior calendar year. The increased
production for both the third quarter and the calendar year to date is a
result of both higher grade and increased diamond recovery due to processing
improvements.
    Ore production for the third quarter was predominately from the A-154
South kimberlite pipe, with less production from A-154 North. In addition, the
removal of overburden and waste rock stripping continued in the new A-418 open
pit with access to the ore body expected by the second calendar quarter of
2008. During the third quarter of 2007, diesel fuel haulage to a newly
constructed fuel tank farm located in Yellowknife commenced. This initiative
is designed to reduce the risk of fuel delivery shortfall to the mine site
during the winter road season, and to take advantage of the pricing
seasonality of diesel fuel purchases. This has significantly increased the
amount of fuel inventory on hand in comparison to last year's quarter end.
    A new mine plan to facilitate underground mining was approved in the
fourth quarter.

    
    Harry Winston Diamond Corporation's 40% Share of Diavik Mine Production
    (reported on a one-month lag)

                                         Three     Three      Nine      Nine
                                        Months    Months    Months    Months
                                         Ended     Ended     Ended     Ended
                                     September September September September
                                      30, 2007  30, 2006  30, 2007  30, 2006
    -------------------------------------------------------------------------
    Diamonds recovered (000s carats)     1,249     1,132     3,600     2,934
    Grade (carats/tonne)                  4.75      3.92      4.95      4.02
    Operating costs, cash ($ millions)    28.2      26.4      79.7      71.1
    Operating costs per carat, cash ($)     23        23        22        24
    -------------------------------------------------------------------------
    

    Cash operating costs for the three months ended September 30, 2007 of
$28.2 million increased by $1.8 million from the comparable period last year.
The increase was substantially due to the strengthening of the Canadian dollar
against the US dollar. Cash operating costs for the nine months ended
September 30, 2007 of $79.7 million increased by $8.6 million over last year
resulting from higher labour, equipment maintenance and fuel costs, as well as
the impact of the appreciating Canadian dollar against that of the US during
the year.

    Retail Segment

    Harry Winston Inc. continued to expand its international presence by
opening a salon in Hong Kong in late September bringing its worldwide network
to 16 retail salons. The retail segment experienced softer sales of high-end
jewelry and watches in the US with international sales showing strong
increases.
    The new watch factory, located in Geneva, Switzerland, was successfully
completed and manufacturing operations commenced in October 2007. The facility
increases the capacity to support the future growth of the watch business.

    Liquidity and Capital Resources

    Working Capital

    At October 31, 2007, Harry Winston Diamond Corporation had unrestricted
cash and cash equivalents of $28.3 million and contingency cash collateral and
reserves of $25.5 million as required under Harry Winston Diamond
Corporation's debt arrangements, compared to $54.2 million and $51.4 million,
respectively, at January 31, 2007. Included in unrestricted cash and cash
equivalents at October 31, 2007 was $7.5 million held at the Diavik Mine
compared to $30.8 million at January 31, 2007. Total cash resources year to
date decreased $51.8 million from $105.6 million at January 31, 2007,
resulting primarily from additional Joint Venture cash calls to support the
development of underground mining.
    Working capital decreased to $56.4 million at October 31, 2007 from
$164.0 million at January 31, 2007. The decrease in working capital primarily
results from the reclassification of the amount drawn under the Harry Winston
Inc. credit facility from long-term at January 31, 2007 to current at
October 31, 2007. The Harry Winston Inc. $200.0 million credit facility is
currently up for renewal, with a maturity date of March 31, 2008. No scheduled
repayments are required before this date.

    Cash Flow from Operations

    During the quarter ended October 31, 2007, Harry Winston Diamond
Corporation generated $61.4 million in cash from operations, compared to
$62.5 million from the comparable quarter of the prior year. Ongoing quarterly
variations in revenues and operating cash flows are inherent in Harry Winston
Diamond Corporation's business, resulting from the seasonality of the mining
and retail activities as well as the rough diamond sales schedule.
    During the quarter, the Company increased advances and prepaid expenses
by $16.0 million, increased inventory by $9.5 million, increased accounts
payable and accrued liabilities by $35.6 million, decreased income taxes
payable by $12.5 million and increased accounts receivable by $22.5 million.
During the nine months ended October 31, 2007, the Company increased inventory
by $57.1 million, increased accounts payable and accrued liabilities by
$27.4 million, increased income taxes payable by $28.0 million, increased
advances and prepaid expenses by $30.2 million and increased accounts
receivable by $27.8 million. Substantially all of the quarterly and
year-to-date increase in accounts receivable represents insurance proceeds
outstanding of $23.2 million relating to the Paris salon robbery, and included
in the change in inventory for the quarter and year-to-date is the write-off
of retail inventory relating to the Paris salon robbery.

    Financing Activities

    During the quarter, Harry Winston Diamond Corporation repaid $7.6 million
of its $100.0 million senior secured term facility that was used to finance
the acquisition of the remaining portion of Harry Winston Inc. At October 31,
2007, the Company had $79.4 million outstanding on its senior secured term
credit facilities and $50.0 million outstanding on its senior secured
revolving credit facility. In comparison, at January 31, 2007, $95.6 million
was outstanding on the term credit facilities and $62.5 million was
outstanding on the secured revolving credit facility.
    As at October 31, 2007, Harry Winston Inc. had $174.7 million outstanding
on its $200.0 million secured credit facility, which is used to fund salon
inventory and capital expenditure requirements. This represents an increase of
$62.7 million from the amount outstanding at January 31, 2007.
    Also included in long-term debt of the Company's retail operations is a
30-year loan agreement for $14.4 million used to finance the construction of
the new watch factory in Geneva, Switzerland. At October 31, 2007,
$14.4 million had been drawn against the facility compared to $2.8 million at
January 31, 2007. The bank has a secured interest in the factory building.
    Harry Winston Japan, K.K. maintains unsecured credit agreements with two
Japanese banks amounting to $13.1 million. At October 31, 2007, $13.1 million
had been drawn against these facilities, $4.4 million of which is long term,
payable on June 28, 2010, with the balance of $8.7 million classified as bank
advances.
    At October 31, 2007, $1.9 million, $8.7 million, $4.0 million and
$1.9 million was drawn under the Company's revolving financing facilities
relating to its Belgian subsidiary, Aber International N.V., its Japanese
subsidiary, Harry Winston Japan, K.K., its Israeli subsidiary, Aber Diamond
Israel 2006 Ltd., and its Indian subsidiary, Aber India Private Limited,
respectively. At January 31, 2007, $18.5 million, $5.7 million, $5.6 million
and nil was drawn under the Company's revolving financing facilities relating
to Aber International N.V., Harry Winston Japan K.K., Aber Diamond Israel 2006
Ltd., and Aber India Private Limited, respectively.
    During the third quarter, the Company made dividend payments of
$14.6 million or $0.25 per share to its shareholders. Rio Tinto Plc, the
operator of the Diavik Diamond Mine, has approved a two-year capital program
to complete the development of an underground mine which secures the future of
the Diavik Project beyond 2020. With this new development plan in hand, Harry
Winston is well advanced in extending its existing debt facilities which,
together with cash flow from operations, will fund Harry Winston's estimated
additional $218 million contribution to complete this project having already
contributed $77 million over the last year. To ensure prudent fiscal
management it is the intention of the Board of Directors to continue to pay
dividends of $0.05 per quarter during the construction period. The Board of
Directors has, therefore, declared a dividend of $0.05 per share to be paid on
January 21, 2008 to shareholders of record on December 28, 2007.

    Investing Activities

    During the quarter, the Company purchased capital assets of
$61.8 million, of which $49.9 million were purchased for the mining segment
and $11.9 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 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 Mine, the Company is
obligated to fund 40% of the Joint Venture's total expenditures on a monthly
basis. Harry Winston Diamond Corporation's current projected share of the
planned capital expenditures at the Diavik Mine, which are not reflected in
the table below, including sustaining capital for the calendar years 2008 to
2012, is approximately $301 million at a budgeted Canadian/US exchange rate of
$1.00. The most significant contractual obligations for the ensuing five-year
period can be summarized as follows:

    
    (expressed in thousands of United States dollars)
    Contractual                      Less than      Year      Year     After
     Obligations               Total    1 Year       2-3       4-5   5 Years
    -------------------------------------------------------------------------

    Long-term debt
     (i)(a)(b)             $ 332,400 $ 213,225 $  98,486 $   2,474 $  18,215
    Environmental and
     participation
     agreements
     incremental
     commitments(c)           36,564    14,396     4,235     2,117    15,816
    Operating lease
     obligations(d)          125,631    15,884    30,143    18,483    61,121
    Capital lease
     obligations(e)            2,368       812     1,333       223         -
    -------------------------------------------------------------------------
    Total contractual
     obligations           $ 496,963 $ 244,317 $ 134,197 $  23,297 $  95,152
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (i)  Excludes deferred financing costs


    (a) Long-term debt presented in the foregoing table includes current
        and long-term portions. The Company may at any time prepay, in whole
        or in part, borrowings under both $100.0 million senior secured term
        credit facilities and the $75.0 million senior secured revolving
        credit facility, in minimum amounts of $5.0 million. On May 31, 2007,
        Harry Winston Diamond Corporation amended its existing credit
        facilities to extend the maturity date to December 15, 2009 from
        December 15, 2008. At October 31, 2007, $79.4 million in total was
        outstanding on both $100 million term credit facilities, and
        $50 million was outstanding on the revolving credit facility.
        Scheduled repayments on the senior secured term credit facilities
        commence March 15, 2008 with $12.5 million in repayments due every
        quarter. The maximum amount permitted to be drawn under the senior
        secured revolving credit facility is reduced by $12.5 million on a
        quarterly basis commencing March 15, 2009.

        The Company's first mortgage on real property has scheduled principal
        payments of approximately $0.1 million quarterly, and may be prepaid
        after 2009. On October 31, 2007, $9.5 million was outstanding on the
        mortgage payable.

        At October 31, 2007, $174.7 million had been drawn against Harry
        Winston Inc.'s $200.0 million secured credit facility. The facility
        expires on March 31, 2008 and consequently has been classified as
        current on the consolidated balance sheet. There are no scheduled
        repayments required before maturity.

        Also included in long-term debt of Harry Winston Inc. is a 30-year
        loan agreement for $14.4 million used to finance the construction of
        the new watch factory in Geneva, Switzerland. The bank has a secured
        interest in the factory building. The mortgage bears interest at a
        rate of 4% with scheduled monthly principal repayments of $0.05
        million commencing December 1, 2007.

    (b) Interest on long-term debt is calculated at various fixed and
        floating rates. On an annualized basis, interest payments are
        estimated to be approximately $22.7 million.

    (c) The Joint Venture, under environmental and other agreements, must
        provide funding for the Environmental Monitoring Advisory Board.
        These agreements also state the Joint Venture must provide security
        deposits for the performance by the Joint Venture of its reclamation
        and abandonment obligations under all environmental laws and
        regulations. The Joint Venture has fulfilled its obligations for the
        security deposits by posting letters of credit of which Harry Winston
        Diamond Corporation's share as at October 31, 2007 was $65.4 million.
        The requirement to post security for the reclamation and abandonment
        obligations may be reduced to the extent of amounts spent by the
        Joint Venture on those activities. The Joint Venture has also signed
        participation agreements with various native groups. These agreements
        are expected to contribute to the social, economic and cultural well-
        being of area Aboriginal bands. The amounts reflected as contractual
        obligations in the table above represent obligations that are in
        addition to the $65.4 million in letters of credit posted. The actual
        cash outlay for the Joint Venture's obligations under these
        agreements is not anticipated to occur until later in the life of the
        Diavik Mine.

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

    Outlook

    Forecasted rough diamond production from the Diavik Mine for the current
calendar year is expected to be approximately 11 million carats, sourced
substantially from the A-154 South kimberlite pipe.
    Year-to-date production has reached 9.0 million carats compared to
7.3 million carats in the comparable period last year due to higher recovery
of diamonds per tonne of ore processed. The substantial increase in diamond
recovery is a combination of improvements to the processing circuit to enhance
the recovery of small diamonds as well as, to a lesser extent, improved
recovery of larger stones. Similar improvements in recovered grade are
expected for all of the Diavik reserves and resources but to differing degrees
for the various geological units of the different kimberlite pipes.
    Subsequent to the end of the quarter, a new mine plan for the Diavik Mine
was completed and approved by Rio Tinto's Board of Directors. The new mine
plan confirms the Diavik Mine life to beyond 2020 and brings into production
underground mining on the A-154 North, A-154 South and A-418 kimberlite pipes.
Underground production commencing in 2009 is expected to be primarily sourced
from the A-418 kimberlite pipe that year supplemented by contributions from   
A-154 North and A-154 South. A-154 North has higher value diamonds than the
other kimberlite pipes. Open pit mining from A-418 will be the main
contributor in 2009. We expect the Diavik Mine to transition fully to
underground by 2012 when we will then be able to more fully access the lower
portions of the ore bodies of A-154South, A-154North and A-418. The ability to
operate multiple ore bodies at once will allow the Diavik Mine to maintain
constant processing plant throughput. A decision has been made to defer the
development of the A-21 kimberlite pipe pending further engineering studies
and economic evaluation.
    The mine operator is preparing a revised resource statement to be
delivered in early calendar 2008. The Company's contribution to capital
requirements to complete the underground development and supporting
infrastructure contemplated by the new mine plan is estimated to be
$218 million over the next two years, with funding expected to be provided
from operating cash flows and an extension of existing credit facilities. The
Company has contributed $77 million year to date in capital towards the
underground development.
    In calendar 2008, mining operations will focus on open pit mining
substantially from A-154 South with contributions from the A-418 kimberlite
pipe.
    The federal government approved the renewal of the Diavik water licence
for a period of eight years, effective from November 1, 2007. The regional
Wek'eezhii Land and Water Board recommended licence renewal after an intensive
two-year public review. The licence was granted subject to increased
environmental monitoring, reporting and management controls. The Diavik Mine
continues to operate in compliance with all environmental permits, licences,
and authorizations.
    The Company expects to hold two primary rough diamond sales in the fourth
quarter compared with three primary sales held in the comparable period last
year. With Harry Winston Diamond Corporation's continued expansion of its
global rough diamond sales network, sales are now conducted throughout the
quarter in each of the Company's three selling offices located in Belgium,
Israel and India.
    Two new Harry Winston retail salons were opened in Chicago and Nagoya
(Japan) during November 2007, increasing the worldwide network of Harry
Winston retail salons to 18 locations.

    Related Parties

    Transactions with related parties for the three months ended October 31,
2007 include $0.4 million of rent ($1.3 million for the nine months ended
October 31, 2007) relating to the New York salon, payable to a Harry Winston
Inc. employee.

    Critical Accounting Estimates

    Management is often required to make judgments, assumptions and estimates
in the application of Canadian GAAP 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, 2007.

    Changes in Accounting Policies

    Financial Instruments, Hedges and Comprehensive Income

    On February 1, 2007, the Company adopted new accounting standards issued
by the Canadian Institute of Chartered Accountants ("CICA") on equity,
financial instruments, hedges and comprehensive income that require investment
securities and hedging derivatives to be accounted for at fair value. These
standards are substantially harmonized with US GAAP.
    The adoption of these new accounting standards has not had a material
impact on the financial position of the Company. For a description of new
standards and the impact on the Company's financial statements, please see
note 3 to the consolidated financial statements on page 29 of this report.

    Recently Issued Accounting Standards

    Inventories

    In May 2007, the CICA issued Handbook Section 3031, "Inventories", which
supersedes the previously issued standard on inventory. The new standard
introduces significant changes to the measurement and disclosure of inventory.
The measurement changes include: the elimination of LIFO, the requirement to
measure inventories at the lower cost method for inventories that are not
ordinarily interchangeable or goods and services produced for specific
purposes, the requirement for an entity to use a consistent cost formula for
inventory of a similar nature and use, and the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. Disclosures of inventories have also been enhanced.
Inventory policies, carrying amounts, amounts recognized as an expense,
write-downs and the reversals of write-downs are required to be disclosed.
This new standard will apply to the Company effective February 1, 2008. The
Company is assessing the impact this standard will have on its consolidated
financial statements.

    Financial Instruments - Disclosures

    In December 2006, the CICA issued Handbook Section 3862, "Financial
Instruments - Disclosures", and Handbook Section 3863, "Financial Instruments
- Presentation", which supersede Handbook Section 3861, the previously issued
standard on financial instruments. Section 3862 provides guidance on
disclosure of risks associated with both recognized and unrecognized financial
instruments and how the Company manages these risks. Section 3863 details
financial instruments presentation requirements, which are unchanged from
those discussed in Section 3861. This new standard will apply to the Company
effective February 1, 2008. The Company is assessing the impact this standard
will have on its consolidated financial statements.

    Capital Disclosures

    In December 2006, the CICA issued Handbook Section 1535, "Capital
Disclosures". This new standard requires the disclosure of information about
an entity's objectives, policies and processes for managing capital. This new
standard will apply to the Company effective February 1, 2008. The Company is
assessing the impact this standard will have on its consolidated financial
statements.

    Risks and Uncertainties

    Harry Winston Diamond Corporation is subject to a number of risks and
uncertainties as a result of its operations, including without limitation the
following risks:

    Nature of Mining

    The operation of the Diavik 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, inherent risks include variations in
rock structure and strength as it impacts on mining method selection and
performance, dewatering 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, 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 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, thereby affecting the Company's
profitability.

    Nature of Joint Arrangement with DDMI

    Harry Winston Diamond Corporation owns an undivided 40% interest in the
assets, liabilities and expenses of the Diavik Mine and the Diavik group of
mineral claims. The Diavik Mine and the exploration and development of the
Diavik group of mineral claims is a joint arrangement between DDMI (60%) and
Harry Winston Diamond Mines Ltd. (formerly Aber Diamond Mines Ltd.) (40%), and
is subject to the risks normally associated with the conduct of joint ventures
and similar joint arrangements. These risks include the inability to exert
influence over strategic decisions made in respect of the Diavik Mine and the
Diavik group of mineral claims. By virtue of DDMI's 60% interest in the Diavik
Mine, it has a controlling vote in virtually all Joint Venture management
decisions respecting the development and operation of the Diavik Mine and the
development of the Diavik group of mineral claims. Accordingly, DDMI is able
to determine the timing and scope of future project capital expenditures, and
therefore is able to impose capital expenditure requirements on the Company
that the Company may not have sufficient cash to meet. A failure by the
Company to meet capital expenditure requirements imposed by DDMI could result
in the Company's interest in the Diavik Mine and the Diavik group of mineral
claims being diluted.

    Diamond Prices and Demand for Diamonds

    The profitability of Harry Winston Diamond Corporation is dependent upon
production from the Diavik Mine and on the results of the operations of Harry
Winston Inc.'s 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 or the
occurrence of terrorist activities creating disruptions in economic growth
could result in decreased demand for luxury goods such as diamonds and
jewelry, thereby negatively affecting the price of diamonds and jewelry.
Similarly, a substantial increase in the worldwide level of diamond production
could also negatively affect the price of diamonds. In each case, such
developments could materially adversely affect Harry Winston Diamond
Corporation's results of operations.

    Currency Risk

    Currency fluctuations may affect the Company's financial performance.
Diamonds are sold throughout the world based principally on the US dollar
price, and although the Company reports its financial results in US dollars, a
majority of the costs and expenses of the Diavik Mine, which are borne 40% by
the Company, are incurred in Canadian dollars. Further, the Company has a
significant future income tax liability that has been incurred and will be
payable in Canadian dollars. Harry Winston Diamond Corporation'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 Mine and
the amount of the Company's Canadian dollar liabilities relative to the
revenue Harry Winston Diamond Corporation 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 Mine and exploration on the Diavik property
require licenses and permits from the Canadian government. Renewal of the
Diavik Mine Type "A" Water License was granted by the regional Wek'eezhii Land
and Water Board on November 1, 2007. While Harry Winston Diamond Corporation
anticipates that DDMI, which is also the operator of the Diavik 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 Mine or to further explore and develop the Diavik
property.

    Regulatory and Environmental Risks

    The operation of the Diavik Mine, exploration activities at the Diavik
Project and the manufacturing of jewelry 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 Mine
and in the manufacture of jewelry. As well, as Harry Winston Diamond
Corporation's international operations expand, it or its subsidiaries become
subject to laws and regulatory regimes which differ materially to 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.

    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. Harry Winston
Diamond Corporation 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 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

    Harry Winston Diamond Corporation's business is subject to a number of
risks and hazards generally, 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 Mine, personal injury or death, environmental
damage to the Diavik property, delays in mining, closing of Harry Winston Inc.
manufacturing facilities or salons, monetary losses and possible legal
liability. Although insurance is maintained to protect against certain risks
in connection with the Diavik Mine, Harry Winston Diamond Corporation's
operations and the operations of Harry Winston Inc., 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 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 Mine currently has
no hedges for its future anticipated fuel consumption.

    Reliance on Skilled Employees

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

    Expansion of the Existing Salon Network

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

    Competition in the Luxury Jewelry Segment

    Harry Winston Diamond Corporation, through its ownership of Harry Winston
Inc., is exposed to competition in the retail diamond market from other luxury
goods, diamond and jewelry retailers. The ability of Harry Winston Inc. to
successfully compete with such luxury goods, diamond and jewelry 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 Harry Winston Diamond Corporation's results of
operations will be adversely affected.

    
    Outstanding Share Information

    As at October 31, 2007
    -------------------------------------------------------------------------
    Authorized                                                     Unlimited
    -------------------------------------------------------------------------
    Issued and outstanding shares                                 58,372,080
    Options outstanding                                            1,619,338
    Fully diluted                                                 59,991,418
    -------------------------------------------------------------------------
    

    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)

                                                     October 31,
                                                           2007   January 31,
                                                     (unaudited)        2007
    -------------------------------------------------------------------------
    Assets
    Current assets:
      Cash and cash equivalents (note 5)            $    28,251  $    54,174
      Cash collateral and cash reserves (note 5)         25,541       51,448
      Accounts receivable (note 12)                      42,451       13,297
      Inventory and supplies (note 6)                   330,790      273,736
      Advances and prepaid expenses                      51,592       21,275
    -------------------------------------------------------------------------
                                                        478,625      413,930
    Deferred mineral property costs                     178,460      188,058
    Capital assets                                      495,475      384,532
    Intangible assets, net                              133,051      134,320
    Goodwill                                             96,575       98,142
    Other assets                                         15,333       18,187
    Future income tax asset                              35,385       50,745
    -------------------------------------------------------------------------
                                                    $ 1,432,904  $ 1,287,914
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities:
      Accounts payable and accrued liabilities      $   153,699  $   118,971
      Income taxes payable                               39,238        5,776
      Bank advances                                      16,494       29,776
      Current portion of long-term debt                 212,783       95,434
    -------------------------------------------------------------------------
                                                        422,214      249,957
    Long-term debt                                      118,771      185,446
    Future income tax liability                         391,987      333,498
    Other long-term liability                             1,087            -
    Future site restoration costs                        17,843       17,200
    Minority interest                                       289           85
    Shareholders' equity:
      Share capital (note 8)                            305,502      305,165
      Contributed surplus                                15,397       14,922
      Retained earnings (note 4)                        137,808      165,625
      Accumulated other comprehensive income             22,006       16,016
    -------------------------------------------------------------------------
                                                        480,713      501,728
    Commitments and guarantees (note 9)
    -------------------------------------------------------------------------
                                                    $ 1,432,904  $ 1,287,914
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



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

                                Three        Three         Nine         Nine
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
                           October 31,  October 31,  October 31,  October 31,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Sales                 $   176,478  $   145,232  $   491,112  $   404,465
    Cost of sales              74,591       74,636      227,550      206,939
    -------------------------------------------------------------------------
                              101,887       70,596      263,562      197,526
    Selling, general and
     administrative
     expenses                  35,539       33,480      104,951       87,944
    -------------------------------------------------------------------------
    Earnings from operations   66,348       37,116      158,611      109,582
    -------------------------------------------------------------------------
    Interest and financing
     expenses                  (7,422)      (5,570)     (20,776)     (14,709)
    Other income (note 12)        594        1,764        2,052        5,191
    Foreign exchange loss     (40,584)      (1,560)     (65,661)      (1,049)
    -------------------------------------------------------------------------
    Earnings before
     income taxes              18,936       31,750       74,226       99,015
    Income tax expense
    (recovery) - Current       (4,856)       3,948       37,675       11,526
    Income tax expense -
     Future                    31,053        9,057       20,387       10,136
    -------------------------------------------------------------------------
    Earnings (loss) before
     minority interest         (7,261)      18,745       16,164       77,353
    Minority interest              90          (86)         204          379
    -------------------------------------------------------------------------
    Net earnings (loss)   $    (7,351) $    18,831  $    15,960  $    76,974
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Earnings (loss) per
     share
      Basic               $     (0.13) $      0.32  $      0.27  $      1.32
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted             $     (0.13) $      0.32  $      0.27  $      1.30
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Weighted average
     number of shares
     outstanding           58,371,004   58,208,653   58,368,409   58,223,777
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


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


                                Three        Three         Nine         Nine
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
                           October 31,  October 31,  October 31,  October 31,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Net earnings (loss)   $    (7,351) $    18,831  $    15,960  $    76,974
    Other comprehensive
     income
      Net gain on translation
       of net foreign
       operations               3,390         (153)       5,990          530
    -------------------------------------------------------------------------
    Total comprehensive
     income (loss)        $    (3,961) $    18,678  $    21,950  $    77,504
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


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

                                                                        Nine
                                                                      Months
                                Three        Three         Nine        Ended
                               Months       Months       Months   October 31,
                                Ended        Ended        Ended         2006
                           October 31,  October 31,  October 31,   (Restated)
                                 2007         2006         2007      (note 4)
    -------------------------------------------------------------------------
    Common shares
    Balance at beginning
     of period            $   305,502  $   302,242  $   305,165  $   300,652
    Issued during the
     period                         -        1,196          337        2,786
    -------------------------------------------------------------------------
    Balance at end of period  305,502      303,438      305,502      303,438
    -------------------------------------------------------------------------
    Contributed surplus
    Balance at beginning
     of period                 15,239       16,096       14,922       15,266
    Stock option expense          158          171          475        1,001
    -------------------------------------------------------------------------
    Balance at end of period   15,397       16,267       15,397       16,267
    -------------------------------------------------------------------------
    Retained earnings
    Balance at beginning
     of period                159,752      148,678      165,625      126,630
    Net earnings (loss)        (7,351)      18,831       15,960       76,974
    Dividends paid            (14,593)     (14,588)     (43,777)     (43,683)
    -------------------------------------------------------------------------
    Balance at end of period  137,808      152,921      137,808      152,921
    -------------------------------------------------------------------------
    Accumulated other
     comprehensive income
    Balance at beginning of
     period                    18,616       17,027       16,016       16,344
    Other comprehensive
     income                     3,390         (153)       5,990          530
    -------------------------------------------------------------------------
    Balance at end of
     period                    22,006       16,874       22,006       16,874
    -------------------------------------------------------------------------
    Total shareholders'
     equity               $   480,713  $   489,500  $   480,713  $   489,500
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


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

                                Three        Three         Nine         Nine
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
                           October 31,  October 31,  October 31,  October 31,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Cash provided by (used in):
    Operating:
    Net earnings (loss)   $    (7,351) $    18,831  $    15,960  $    76,975
    Items not involving
     cash:
      Amortization and
       accretion               20,704       19,441       60,361       50,729
      Future income taxes      31,053        9,057       20,387       10,135
      Stock-based
       compensation and
       other                      158          171        1,563        1,001
      Foreign exchange
       loss, net               41,639        1,576       66,540        2,603
    Minority interest              90          (89)         204          351
    Change in non-cash
     operating working
     capital                  (24,925)      13,550      (59,651)     (17,591)
    -------------------------------------------------------------------------
                               61,368       62,537      105,364      124,203
    -------------------------------------------------------------------------
    Financing:
    Repayment of long-term
     debt                      (7,626)        (107)     (16,620)     (10,312)
    Increase (decrease) in
     revolving credit          (1,790)     116,281       52,955      155,540
    Dividends paid            (14,593)     (14,588)     (43,777)     (43,683)
    Issue of common shares          -        1,196          337        2,786
    Cash advance from
     minority shareholder           -            3            -         (827)
    -------------------------------------------------------------------------
                              (24,009)     102,785       (7,105)     103,504
    -------------------------------------------------------------------------
    Investing:
    Cash collateral and
     cash reserve                 (31)      25,731       25,907      (28,262)

    Deferred mineral
     property costs             1,320       (4,307)      (6,840)     (11,331)
    Capital assets            (61,847)     (40,626)    (143,352)     (89,983)
    Other assets                  (48)        (587)        (793)        (852)
    Purchase of Harry
     Winston Inc.                   -     (159,150)           -     (159,150)
    -------------------------------------------------------------------------
                              (60,606)    (178,939)    (125,078)    (289,578)
    -------------------------------------------------------------------------
    Foreign exchange
     effect on cash
     balances                    (150)         127          896        1,425
    Decrease in cash and
     cash equivalents         (23,397)     (13,490)     (25,923)     (60,446)
    Cash and cash
     equivalents, beginning
     of period                 51,648      101,160       54,174      148,116
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end of
     period               $    28,251  $    87,670  $    28,251  $    87,670
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Change in non-cash
     operating working
     capital:
    Accounts receivable       (22,549)      (4,534)     (27,827)      (3,211)
    Advances and prepaid
     expenses                 (16,037)       6,116      (30,172)       6,181
    Inventory and supplies     (9,477)      (9,222)     (57,053)     (44,881)
    Income taxes payable      (12,471)      (5,894)      28,040       (6,096)
    Accounts payable and
     accrued liabilities       35,609       27,084       27,361       30,416
    -------------------------------------------------------------------------
                          $   (24,925) $    13,550  $   (59,651) $   (17,591)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental cash flow
     information:
    Cash taxes paid       $     3,805  $      (566) $     6,846  $     9,297
    Cash interest paid    $     6,282  $     5,391  $    17,488  $    13,523
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



                 Notes to Consolidated Financial Statements
                 ------------------------------------------

                  October 31, 2007 with comparative figures
       (tabular amounts in thousands of United States dollars, except
                             as otherwise noted)

    NOTE 1:

    Change in Name

    Effective November 9, 2007, Aber Diamond Corporation changed its name to
    Harry Winston Diamond Corporation.

    Note 2:

    Nature of Operations

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

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

    During fiscal 2007, the Company acquired the remaining 47.17% interest in
    Harry Winston Inc. that it did not previously own. The results of Harry
    Winston Inc., located in New York City, US, are consolidated in the
    financial statements of the Company.

    Note 3:

    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,
    2007, since these interim financial statements do not include all
    disclosures required by Canadian generally accepted accounting principles
    ("GAAP"). Excluding adoption of the new standards for financial
    instruments 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, 2007.

    Changes in Accounting Policy

    On February 1, 2007, the Company adopted three new accounting standards
    issued by the Canadian Institute of Chartered Accountants ("CICA") on
    financial instruments, hedges and comprehensive income that require
    investment securities and hedging derivatives to be accounted for at fair
    value.

    Financial Instruments

    This new standard requires the Company to revalue certain of its
    financial assets and liabilities, including derivatives designated in
    qualifying hedging relationships and embedded derivatives in certain
    contracts, at fair value on the initial date of implementation and at
    each subsequent financial reporting date.

    The adoption of this new standard has not had a material impact on the
    financial position of the Company. Under the new standard, the Company
    has elected to add transaction costs related to its non-revolving long-
    term debt to the carrying amount of the debt, which has resulted in the
    following adjustments to the consolidated balance sheet on February 1,
    2007:

                                                      As at February 1, 2007
                                                          Increase/(Decrease)
    -------------------------------------------------------------------------
    Assets
    Other assets                                                 $      (859)
    Liabilities and Shareholders' Equity
    Long-term debt                                               $      (859)
    Cumulative translation adjustment                                (16,016)
    Accumulated other comprehensive income                            16,016
    -------------------------------------------------------------------------

    This standard has had no material impact on the consolidated statement of
    earnings. Prior period earnings have not been restated.

    This standard also requires the Company to classify financial assets and
    liabilities according to their characteristics and management's choices
    and intentions related thereto for the purposes of ongoing measurement.
    Subsequent measurement for these assets and liabilities is based on
    either fair value or amortized cost using the effective interest method,
    depending upon their classification. In accordance with the new standard,
    the Company's financial assets and liabilities are generally classified
    and measured as follows:

    Asset/Liability                   Category               Measurement

    Cash and cash equivalents         Held for trading       Fair value
    Cash collateral and cash          Held for trading       Fair value
     reserves
    Accounts receivable               Loans and receivables  Amortized cost
    Accounts payable and accrued      Held for trading       Fair value
     liabilities
    Income taxes payable              Held for trading       Fair value
    Bank advances                     Held for trading       Fair value
    Long-term debt                    Other liabilities      Amortized cost

    Hedges

    This new standard contains new rules for reporting fair value and cash
    flow hedges. The Company has no significant hedges and therefore this new
    standard has had no impact on the Company's consolidated financial
    statements.

    Comprehensive Income

    This new standard requires the Company to present a new consolidated
    statement of comprehensive income to detail income items impacting
    accumulated other comprehensive income, which is reported as part of
    shareholders' equity. This statement has been included above in the
    consolidated statement of changes in shareholders' equity.

    Recently Issued Accounting Standards

    Inventories

    In May 2007, the CICA issued Handbook Section 3031, "Inventories", which
    supersedes the previously issued standard on inventory. The new standard
    introduces significant changes to the measurement and disclosure of
    inventory. The measurement changes include: the elimination of LIFO, the
    requirement to measure inventories at the lower cost method for
    inventories that are not ordinarily interchangeable or goods and services
    produced for specific purposes, the requirement for an entity to use a
    consistent cost formula for inventory of a similar nature and use, and
    the reversal of previous write-downs to net realizable value when there
    is a subsequent increase in the value of inventories. Disclosures of
    inventories have also been enhanced. Inventory policies, carrying
    amounts, amounts recognized as an expense, write-downs and the reversals
    of write-downs are required to be disclosed.

    Financial Instruments - Disclosures

    In December 2006, the CICA issued Handbook Section 3862, "Financial
    Instruments - Disclosures", and Handbook Section 3863, "Financial
    Instruments - Presentation", which supersede Handbook Section 3861, the
    previously issued standard on financial instruments. Section 3862
    provides guidance on disclosure of risks associated with both recognized
    and unrecognized financial instruments and how the Company manages these
    risks. Section 3863 details financial instruments presentation
    requirements, which are unchanged from those discussed in Section 3861.

    Capital Disclosures

    In December 2006, the CICA issued Handbook Section 1535, "Capital
    Disclosures". This new standard requires the disclosure of information
    about an entity's objectives, policies and processes for managing
    capital.

    These new standards will apply to the Company effective February 1, 2008.
    The Company is assessing the impact these standards will have on its
    consolidated financial statements.

    Note 4:

    Restatement

    The Company has determined that the $7.0 million received from Tiffany in
    fiscal 2005 to remove certain restrictions on the resale of its shares
    owned by Tiffany should be treated as a capital transaction rather than
    included in other income. The impact of this correction is to reduce
    fiscal 2005 other income by $7.0 million, or $0.12 per share (basic and
    fully diluted), and to create contributed surplus of $7.0 million.
    Accordingly, other income, net income and earnings per share for the year
    ended January 31, 2005 are restated to $2.6 million, $46.1 million,
    $0.80 basic earnings per share and $0.78 fully diluted earnings per
    share, respectively. Originally this amount was classified as an
    operating activity rather than a financing activity in the consolidated
    statement of cash flows. Accordingly, cash provided by operating
    activities in fiscal 2005 would decrease to $143.4 million and cash used
    in financing activities would decrease to $54.0 million. Retained
    earnings at the beginning of fiscal 2006 have been restated to reflect
    the above.

    Note 5:

    Cash Resources
                                                     October 31,  January 31,
                                                           2007         2007
    -------------------------------------------------------------------------
    Diavik Joint Venture                            $     7,509  $    30,776
    Cash and cash equivalents                            20,742       23,398
    -------------------------------------------------------------------------
    Total cash and cash equivalents                      28,251       54,174
    Cash collateral and cash reserves                    25,541       51,448
    -------------------------------------------------------------------------
    Total cash resources                            $    53,792  $   105,622
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 6:

    Inventory and Supplies

                                                     October 31,  January 31,
                                                           2007         2007
    -------------------------------------------------------------------------
    Rough diamond inventory                         $    17,403  $    17,648
    Merchandise inventory                               264,071      228,157
    Supplies inventory                                   49,316       27,931
    -------------------------------------------------------------------------
    Total inventory and supplies                    $   330,790  $   273,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 7:

    Diavik Joint Venture

    The following represents Harry Winston Diamond Corporation's 40%
    proportionate interest in the Joint Venture as at September 30, 2007 and
    December 31, 2006, which is reflected in the Company's consolidated
    financial statements as follows:

                                                     October 31,  January 31,
                                                           2007         2007
    -------------------------------------------------------------------------
    Current assets                                  $    98,563  $    66,037
    Long-term assets                                    555,387      477,753
    Current liabilities                                  46,114       35,671
    Long-term liabilities and participant's account     607,836      508,119
    -------------------------------------------------------------------------

                                Three        Three         Nine         Nine
                               Months       Months        Months      Months
                                Ended        Ended        Ended        Ended
                           October 31,  October 31,  October 31,  October 31,
                                 2007         2006         2007         2006
    -------------------------------------------------------------------------
    Net expense                48,118       46,209      135,828      127,127
    Cash flows resulting
     from operating
     activities               (14,044)     (28,960)     (98,027)     (80,079)
    Cash flows resulting
     from financing
     activities                64,007       59,597      207,733      161,640
    Cash flows resulting
     from investing
     activities               (54,409)     (35,354)    (122,222)     (74,076)
    -------------------------------------------------------------------------

    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 8:

    Share Capital

    (a) Authorized

        Unlimited common shares without par value.

    (b) Issued
                                                      Number of
                                                         Shares       Amount
        ---------------------------------------------------------------------
        Balance, January 31, 2007                    58,360,755  $   305,165
        Shares issued for:
          Exercise of options                            11,325          337
        ---------------------------------------------------------------------
        Balance, October 31, 2007                    58,372,080  $   305,502
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    (c) RSU and DSU Plans
                                                             Number of Units
        ---------------------------------------------------------------------
        Balance, January 31, 2007                                    233,539

        Net awards during the period                                  32,821
        Payouts during the period                                    (52,548)
        ---------------------------------------------------------------------
        Balance, October 31, 2007                                    213,812
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

                                Three        Three         Nine         Nine
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
        Expense for        October 31,  October 31,  October 31,  October 31,
        the period:              2007         2006         2007         2006
        ---------------------------------------------------------------------
        RSU               $       629  $       151  $     1,089  $       676
        DSU                       362          404          365          367
        ---------------------------------------------------------------------
                          $       991  $       555  $     1,454  $     1,043
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the third quarter, the Company granted 15,779 Restricted Share
        Units ("RSUs") and 3,651 Deferred Share Units ("DSUs") under an
        employee and director incentive compensation program, respectively.
        The RSU and DSU Plans are full value phantom shares that mirror the
        value of Harry Winston Diamond Corporation's publicly traded common
        shares. In the second quarter, 52,548 RSUs vested, resulting in a
        payout of $2.1 million.

        Grants under the RSU Plan are primarily on a discretionary basis to
        employees of the Company subject to Board of Director approval. Each
        RSU grant vests on the third anniversary of the grant date, subject
        to special rules for death and disability. The Company settles its
        obligations under the RSU and DSU plans in cash in accordance with
        the terms of the respective plans.

        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. Harry Winston Diamond Corporation's share of this
        funding requirement was $0.2 million for calendar 2007. 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. Harry Winston Diamond
        Corporation's share of the Joint Venture's letters of credit
        outstanding with respect to the environmental agreements as at
        October 31, 2007 was $65.4 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 twelve years and shall be
        automatically renewed on terms to be agreed for successive periods of
        six years thereafter until termination. The agreements terminate in
        the event the mine permanently ceases to operate.

    (c) Commitments

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

        2008                                                     $    83,590
        2009                                                          98,119
        2010                                                          98,053
        2011                                                          95,467
        2012                                                          95,557
        Thereafter                                                   164,578
        ---------------------------------------------------------------------

    Note 10:

    Employee Benefit Plans

                                Three        Three         Nine         Nine
                               Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
    Expenses for           October 31,  October 31,  October 31,  October 31,
    the period:                  2007         2006         2007         2006
    -------------------------------------------------------------------------
    Defined benefit
     pension plan at Harry
     Winston Inc.         $         6  $        70  $        18  $       130
    Defined contribution
     plan at Harry
     Winston Inc.                 210           90          810          270
    Defined contribution
     plan at the Diavik
     Mine                         218          174          619          538
    -------------------------------------------------------------------------
                          $       434  $       334  $     1,447  $       938
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 11:

    Related Parties

    Transactions with related parties for the nine months ended October 31,
    2007 include $1.3 million ($1.3 million for the nine months ended
    October 31, 2006) of rent relating to the New York salon, payable to a
    Harry Winston Inc. employee.

    Note 12:

    Insurance Claim

    In October 2007, approximately $23.2 million in Company-owned retail
    inventory at cost was stolen during a robbery at the Harry Winston Paris
    salon and written off to other income during the quarter. The Company is
    fully insured against the loss, and has offset the inventory write-off by
    setting up a receivable for the insurance proceeds equal to the inventory
    write-off. The insurance claim is subject to investigation by the
    insurance company, which is expected to be completed during the fourth
    quarter of fiscal 2008, at which time the claim will be settled.
    Subsequent to the end of the quarter, the Company received partial
    proceeds of $18.0 million.

    Note 13:

    Comparative Figures

    Certain of the prior period's figures have been reclassified to conform
    to the current year presentation.

    Note 14:

    Segmented Information

    The Company operates in two segments within the diamond industry, mining
    and retail, for the three months ended October 31, 2007.

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

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

    For the three months ended
    October 31, 2007                        Mining       Retail        Total
    -------------------------------------------------------------------------
    Sales
      Canada                           $   122,711  $         -  $   122,711
      United States                              -       19,413       19,413
      Europe                                     -       20,400       20,400
      Asia                                       -       13,954       13,954
    Cost of sales                           45,985       28,606       74,591
    -------------------------------------------------------------------------
                                            76,726       25,161      101,887
    Selling, general and
     administrative expenses                 6,748       28,791       35,539
    -------------------------------------------------------------------------
    Earnings (loss) from operations         69,978       (3,630)      66,348
    -------------------------------------------------------------------------
    Interest and financing expenses         (3,862)      (3,560)      (7,422)
    Other income                               606          (12)         594
    Foreign exchange gain (loss)           (41,502)         918      (40,584)
    -------------------------------------------------------------------------
    Segmented earnings (loss) before
     income taxes                      $    25,220  $    (6,284) $    18,936
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Segmented assets as at October 31,
     2007
      Canada                           $   784,468  $         -  $   784,468
      United States                              -      493,494      493,494
      Other countries                       12,855      142,087      154,942
    -------------------------------------------------------------------------
                                       $   797,323  $   635,581  $ 1,432,904
    -------------------------------------------------------------------------
    Goodwill as at October 31, 2007    $         -  $    96,575  $    96,575
    Capital expenditures               $    49,900  $    11,947  $    61,847
    Other significant non-cash items:
      Income tax expense (recovery) -
       Future                          $    31,764  $      (711) $    31,053
      Amortization and accretion       $    18,575  $     2,129  $    20,704
    -------------------------------------------------------------------------

    For the three months ended
    October 31, 2006                        Mining       Retail        Total
    -------------------------------------------------------------------------
    Sales
      Canada                           $    90,754  $         -  $    90,754
      United States                              -       24,919       24,919
      Europe                                     -       18,724       18,724
      Asia                                       -       10,835       10,835
    Cost of sales                           45,461       29,175       74,636
    -------------------------------------------------------------------------
                                            45,293       25,303       70,596
    Selling, general and administrative
     expenses                                4,665       28,815       33,480
    -------------------------------------------------------------------------
    Earnings (loss) from operations         40,628       (3,512)      37,116
    -------------------------------------------------------------------------
    Interest and financing expenses         (3,484)      (2,086)      (5,570)
    Other income (expenses)                  1,782          (18)       1,764
    Foreign exchange loss                     (836)        (724)      (1,560)
    -------------------------------------------------------------------------
    Segmented earnings (loss) before
     income taxes                      $    38,090  $    (6,340) $    31,750
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Segmented assets as at October 31,
     2006
      Canada                           $   726,180  $         -  $   726,180
      United States                              -      417,211      417,211
      Other countries                       20,316       82,777      103,093
    -------------------------------------------------------------------------
                                       $   746,496  $   499,988  $ 1,246,484
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill as at October 31, 2006    $         -  $   154,915  $   154,915
    Capital expenditures               $    35,524  $     5,102  $    40,626

    Other significant non-cash items:
      Income tax expense (recovery)    $     9,628  $      (571) $     9,057
      Amortization and accretion       $    18,077  $     1,364  $    19,441
    -------------------------------------------------------------------------


    Sales to one customer in the mining segment totalled $6.6 million for the
    three months ended October 31, 2007 ($7.9 million for the three months
    ended October 31, 2006).


    For the nine months ended
    October 31, 2007                        Mining       Retail        Total
    -------------------------------------------------------------------------
    Sales
      Canada                           $   310,534  $         -  $   310,534
      United States                              -       65,917       65,917
      Europe                                     -       63,994       63,994
      Asia                                       -       50,667       50,667
    Cost of sales                          132,718       94,832      227,550
    -------------------------------------------------------------------------
                                           177,816       85,746      263,562
    Selling, general and administrative
     expenses                               17,696       87,255      104,951
    -------------------------------------------------------------------------
    Earnings (loss) from operations        160,120       (1,509)     158,611
    -------------------------------------------------------------------------
    Interest and financing expenses        (11,519)      (9,257)     (20,776)
    Other income                             1,728          324        2,052
    Foreign exchange gain (loss)           (66,798)       1,137      (65,661)
    -------------------------------------------------------------------------
    Segmented earnings (loss) before
     income taxes                      $    83,531  $    (9,305) $    74,226
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Segmented assets as at October 31,
     2007
      Canada                           $   784,468  $         -  $   784,468
      United States                              -      493,494      493,494
      Other countries                       12,855      142,087      154,942
    -------------------------------------------------------------------------
                                       $   797,323  $   635,581  $ 1,432,904
    -------------------------------------------------------------------------
    Goodwill as at October 31, 2007    $         -  $    96,575  $    96,575
    Capital expenditures               $   114,369  $    28,983  $   143,352
    Other significant non-cash items:
      Income tax expense (recovery) -
       Future                          $    21,959  $    (1,572) $    20,387
      Amortization and accretion       $    54,234  $     6,127  $    60,361
    -------------------------------------------------------------------------


    For the nine months ended
    October 31, 2006                        Mining       Retail        Total
    -------------------------------------------------------------------------
    Sales
      Canada                           $   251,538  $         -  $   251,538
      United States                              -       64,252       64,252
      Europe                                     -       49,959       49,959
      Asia                                       -       38,716       38,716
    Cost of sales                          127,466       79,473      206,939
    -------------------------------------------------------------------------
                                           124,072       73,454      197,526
    Selling, general and administrative
     expenses                               13,824       74,120       87,944
    -------------------------------------------------------------------------
    Earnings (loss) from operations        110,248         (666)     109,582
    -------------------------------------------------------------------------
    Interest and financing expenses         (8,996)      (5,713)     (14,709)
    Other income                             5,156           35        5,191
    Foreign exchange loss                     (595)        (454)      (1,049)
    -------------------------------------------------------------------------
    Segmented earnings (loss) before
     income taxes                      $   105,813  $    (6,798) $    99,015
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Segmented assets as at October 31,
     2006
      Canada                           $   726,180  $         -  $   726,180
      United States                              -      417,211      417,211
      Other countries                       20,316       82,777      103,093
    -------------------------------------------------------------------------
                                       $   746,496  $   499,988  $ 1,246,484
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Goodwill as at October 31, 2006    $         -  $   154,915  $   154,915
    Capital expenditures               $    75,865  $    14,118  $    89,983
    Other significant non-cash items:
      Income tax expense (recovery)    $    12,306  $    (2,170) $    10,136
      Amortization and accretion       $    46,913  $     3,816  $    50,729
    -------------------------------------------------------------------------

    Sales to one customer in the mining segment totalled $19.3 million for
    the nine months ended October 31, 2007 ($22.1 million for the nine months
    ended October 31, 2006).
    

    %SEDAR: 00003786E




For further information:

For further information: Nancy Murray, nmurray@harrywinston.com, (212)
245-2000

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Dominion Diamond Corporation

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