Exhibit 4

HARRY WINSTON

The

2008

Harry Winston Diamond Corporation

Annual Report
 

ABOVE:
Diamond cluster earrings

COVER:
Emerald -cut diamond ring

HARRY WINSTON DIAMOND CORPORATION
 

Harry Winston Diamond Corporation is a specialist diamond enterprise with premium 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 diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, Tokyo and Beverly Hills.

The Company focuses on the two most profitable segments of the diamond industry, mining and retail, in which its expertise creates shareholder value. This unique business model provides key competitive advantages; rough diamond sales and polished diamond purchases provide market intelligence that enhances the Company’s overall performance.  Moreover, being one of the world’s leading rough diamond suppliers enables the Company to use its strong client relationships to secure the highest-quality polished diamonds for its retail division. By linking the production and retailing of diamonds, Harry Winston Diamond Corporation benefits from the market synergy created between rough diamond producer, polished diamond buyer and retailer of fine diamond jewelry.

2

LETTER TO SHAREHOLDERS

6

A COMPELLING INVESTMENT

8

UNIQUELY POSITIONED

10

GROWTH AND OPPORTUNITY

14

REVIEW OF FINANCIALS

ABOVE:
Diamond band rings

2008 ANNUAL REPORT

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HARRY WINSTON DIAMOND CORPORATION

New York Stock Exchange
Center of photo: Robert Gannicott, Chairman & Chief Executive Officer, rings the bell at the New York Stock Exchange with Thomas O’Neill, President.
 

Fellow Shareholders,

The last year has seen the operational performance of both of our businesses improve substantially. Rough diamond production from our 40% share of the Diavik Mine increased by 22%. The value of our rough diamond sales increased by 24%. Diamond jewelry and watch sales from our retail organization increased by 17%, and we opened five new salons around the world. On a consolidated basis, our earnings from operations increased by 48% to a record $218 million. In late fall, we took a major step in positioning our company by capitalizing on the name that is synonymous with diamonds. By renaming our enterprise Harry Winston Diamond Corporation we can now take full advantage of the recognition afforded America’s only true luxury brand. From current performance to future positioning, it was a record year, and yet our share price declined substantially, plumbing lows not seen in three years. What went wrong? A good deal of the answer can be assigned to external factors. The woes of the US banking sector have become a worldwide and cross-sectoral malignancy that has caused the forced sale of many assets, including equities, into a frightened and illiquid market-place. Sales have been met by a dearth of buyers. In November, after we listed our company as Harry Winston Diamond Corporation on the New York Stock Exchange and were recognized as a luxury business, we were caught in the sharp share price declines experienced by all of the leading luxury goods companies. The equity market has taken the view that luxury products, including diamonds, will suffer from a US downturn. This is too broad an analysis. Our sales in important markets outside of the US have continued to strengthen. Not all of the blame can be assigned elsewhere. Late last year, the capital cost of our underground mine development, bringing new ore reserves into the mine plan, increased substantially from the original estimate and we had to reduce the dividend payments to shareholders, and sell a modest amount of new equity in order to pursue a new mining credit facility in the troubled debt market.

2008 ANNUAL REPORT

2

HARRY WINSTON DIAMOND CORPORATION

Our mining business has faced increased operating costs, particularly from high oil prices, intense competition for labour, and increased costs for almost all of our consumables, especially those like cement that have a high energy cost component. The Canadian dollar, which dominates our expenditures, has appreciated substantially against the US dollar in which our product is priced and sold. Fortunately, the pricing of larger, better-quality rough diamonds that dominate our mine production has also increased and continues to do so. The diamond production from any mine is composed of stones that are components of luxury items, as well as many that are not. The Diavik production and Harry Winston jewelry are rooted in the former. The silver lining to these tumultuous changes is that the customer base for our high-end jewelry product has shifted substantially towards those who are the recipients of the revenues from high commodity pricing and rapid economic expansion. The diamond market, for the kind of diamonds that dominate the Diavik production profile, as well as those sold by Harry Winston in its jewelry, has continued to appreciate throughout last year, and into this one, as new demand from Russia, the Far East, Brazil and India replaces a softness in the broader US market-place. We began this year well positioned for growth, with exceptionally strong retail sales in February helping to offset the usual seasonal weakness in rough diamond sales from the open pits at our Arctic mine site. We will be able to mine underground during subsequent winters, which should ameliorate this seasonal variance. Looking to the future, the Diavik Mine operator, Rio Tinto plc, has adopted a new mine plan which expands the reserve base, and therefore mine life, of the project beyond 2020. This plan adds significant value to the project, and secures our position as an important rough diamond supplier for years to come as we continue to look for other mining opportunities. On the retail side of our business, we are positioned to benefit from the investments, both financially and operationally, we have made over the past few years as we have grown our salon count from six to 18 in little over three years. Today we have salons worldwide with our retail network reaching from Beijing to Hong Kong to Paris to Beverly Hills – and many luxury markets in between. One new store is planned for the US in Orange County, California. We continue to nurture new wholesale relationships in Russia and Dubai. Although we will continue to explore new opportunities for salon expansion, the coming year will be more focused on refining this business following the rapid expansion. We are building a stronger organization and a more diverse Board of Directors. I would like to welcome Matt Barrett and Micheline Bouchard to our Board, and to thank Lars-Eric Johansson and John Willson, who are leaving our Board this year, for their expertise and contributions over their years of service. Luxury, especially branded luxury, is now a global business. As close to three-billion people undergo an industrial revolution, new buyers of luxury diamond jewelry are created daily. Both our mine product and our Harry Winston jewelry offering are ideally positioned to find and supply them.

The diamond market, for the kind of
diamonds that dominate the Diavik
production profile, as well as those sold by
Harry Winston in its jewelry, has continued
to appreciate throughout last year.

ROBERT A. GANNICOTT CHAIRMAN & CHIEF EXECUTIVE OFFICER	THOMAS J.O’NEILL PRESIDENT

2008 ANNUAL REPORT

3

HARRY WINSTON DIAMOND CORPORATION

The most

compelling

investment in the

diamond industry
 

Diamonds are the currency of the heart.

For centuries they have been used to mark

the most important moments in people’s

lives. Times change, markets change but

diamonds endure. Their appeal crosses all

geographies and demographics and drives

a demand that continues to grow globally.

2008 ANNUAL REPORT

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HARRY WINSTON DIAMOND CORPORATION

When considered as jewelry, diamonds are judged according to cut, colour, carat and clarity. When considered as an investment, a diamond company should be judged according to performance and potential, and that makes Harry Winston Diamond Corporation a compelling proposition. The global diamond jewelry market is currently valued at approximately $68 billion with an average annual forecasted growth rate of 4%. The growing demand for jewelry is fueling a corresponding increase in the demand for top-quality rough stones – and the demand far exceeds current supply. In fact, over the next ten years, the shortage of rough stones is expected to increase as several major mines move toward the end of their productive lives. The scarcity of supply has inevitably led to a steady increase in the average price of rough diamonds, especially the larger, higher quality diamonds that make up most of the value in the Diavik Diamond Mine production. Among the factors contributing to the increase in the demand for diamond jewelry, is the accompanying increase in the world’s population of high net-worth individuals. The most dramatic increase in the percentage of wealthy individuals occurred in emerging markets such as the Asia-Pacific region and India, which also experienced strong growth in the demand for diamond jewelry. In North America and Europe, cultural and demographic trends such as women’s greater financial autonomy, a rising class of affluent young consumers and the still significant influence of the Baby Boom generation all contributed to the increased demand for diamonds. History has shown that, even during fluctuations in the economic cycle, the demand for quality stones and diamond jewelry tends to remain strong. Harry Winston Diamond Corporation’s 40% share in the exceptionally productive Diavik Diamond Mine and our ownership of Harry Winston Inc., the world’s premier diamond jewelry retailer, position us to thrive in almost any market, and also makes us perhaps the most compelling investment in the luxury diamond sector.

ABOVE:
Diamond drop earrings

2008 ANNUAL REPORT

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HARRY WINSTON DIAMOND CORPORATION

Uniquely

positioned

to build

rewarding relationships

Harry Winston Diamond Corporation has

competitors, but no peers. We are the largest

publicly traded company that focuses on the

two most profitable segments of the diamond

industry: mining and retail. This enables us

to gain insights, build relationships and

create opportunities that no other company

can match. This is our unique advantage.

2008 ANNUAL REPORT

8

HARRY WINSTON DIAMOND CORPORATION

Harry Winston Diamond Corporation creates value for shareholders through two remarkable assets – the Diavik Diamond Mine and Harry Winston Inc. With these assets, we participate in the two most profitable segments of the diamond industry – mining and branded retail – both of which provide margins of approximately 50% or more. Harry Winston Diamond Corporation owns a 40% interest in the Diavik Diamond Mine located in Canada’s Northwest Territories. Operated as a joint arrangement with Rio Tinto plc, the Diavik Diamond Mine is one of the world’s richest diamond mines, with some of the world’s highest ore values per tonne. As of December 2007, the Diavik reserves are estimated at 77.1 million carats of rough diamonds, with resources additional to the reserves estimated at 24.2 million carats of rough diamonds. Since commercial production began in August 2003, the Diavik Mine has produced more than 41.5 million carats. In the past year, Harry Winston’s 40% share produced more than $400 million worth of the world’s $13 billion supply of rough diamonds. Our share of rough diamonds from the Diavik Diamond Mine is taken to our sorting facility in Toronto, the only one of its kind in North America, where they are sorted into 15,000 categories. The rough diamonds are then packaged into custom assortments, based on our clients’ specific needs, and sold through our offices in Belgium, Israel and India. Such a high degree of customization is rare in the industry, and our clients are willing to pay a premium price for packages tailored to their requirements. The market for high-end diamonds is very fluid and prices are continually changing. As both a seller of rough stones and a purchaser of polished diamonds, the Company is constantly aware of real-time prices in the market. By sharing this knowledge between our sales and purchasing divisions, we are well-positioned to seek to ensure that, whether selling or buying, the Company always receives the best price for diamonds. The strong relationships we build as a seller of rough diamonds are also invaluable in allowing us to secure a reliable supply of quality diamonds for our retail division. World renowned for matchless craftsmanship and beautiful jewelry, Harry Winston Inc. is the first name in diamond jewelry. According to a survey conducted by the Luxury Institute, Harry Winston, for the third consecutive year in a row, was named the world’s most prestigious ultra-luxury jewelry brand. Uniting one of the world’s richest diamond mines with the world’s premier diamond jewelry brand has made Harry Winston Diamond Corporation a company like no other. Our unique position in the market – producer, seller, buyer, and retailer – gives us an unmatched ability to leverage our knowledge and our relationships in a way that benefits our business and creates value for our shareholders.

ABOVE:
Rough stones  from the Diavik Mine

2008 ANNUAL REPORT

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HARRY WINSTON DIAMOND CORPORATION

We see growth and

opportunity in

everything we do

Harry Winston Diamond Corporation is a

growing company. At the Diavik Diamond Mine,

production has increased and there are

opportunities for further exploration on the

property. To leverage our sorting and selling

expertise, we may market rough stones for third

parties. At Harry Winston Inc., we are expanding

our salon network and our range of jewelry and

timepiece offerings, while carefully preserving

the equity of the Harry Winston brand.

2008 ANNUAL REPORT

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HARRY WINSTON DIAMOND CORPORATION

Harry Winston Diamond Corporation is pursuing growth in mining, sorting and retail. In November 2007, we announced a plan for underground mining at the Diavik Diamond Mine that should extend the mine’s productive life beyond 2020. A new mine plan, announced in March 2008, included a new, increased statement of proven and probable ore reserves available at Diavik. Simply stated, after having actively mined the site since 2003, we enter this year with a similar level of reserves as when we started mining five years ago having produced 41.5 million carats in the meantime. Over the next two years, we will contribute approximately $221 million to implement the plan, and underground mining is expected to begin in 2009. In addition to pursuing growth at our existing operation, the joint venture is engaged in further exploration of the Diavik property and we remain open to exploration opportunities beyond Diavik. We also see an opportunity to increase revenue and establish new industry relationships by potentially offering the services of our Toronto sorting facility to third party producers. We are strategically expanding our salon network in response to the growing demand for our timepieces and jewelry. Simply put, the world wants more Harry Winston. Last year, Harry Winston Inc. opened five new salons – Tokyo-Roppongi, Beijing, Hong Kong, Chicago and Nagoya – and we now have 18 salons in the luxury capitals of the world. We believe that every visit to a Harry Winston salon is a special experience. To ensure that it is, we intend to grow selectively by opening new salons and refurbishing existing ones each year. Ultimately, we feel we can support up to 40 salons worldwide without the risk of compromising our brand. The demand for our award-winning, limited-edition men’s and women’s watches continues to grow, and we see enormous potential in both the retail and wholesale markets. In order to meet increasing demand while also meeting Harry Winston standards, we recently opened a new watch-making facility in Geneva, Switzerland. Harry Winston jewelry is still made by hand in the atelier above our Fifth Avenue salon, and our commitment to unsurpassed craftsmanship connects us to customers who are looking for something truly exceptional. New generations are being introduced to Harry Winston through special editions of our classic designs and through our new collections that reflect contemporary tastes while respecting our heritage. We also continue to turn heads and capture hearts with the extraordinary statement pieces and breathtaking diamond engagement rings for which Harry Winston is world renowned.

ABOVE:
Three-row diamond cufflinks

2008 ANNUAL REPORT

11

Review of Financials

16

MANAGEMENT’S DISCUSSION AND ANALYSIS

34

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL IN FORMATION

35

SHAREHOLDERS’ AUDITORS’ REPORT

36

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

37

CONSOLIDATED FINANCIAL STATEMENTS

41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

58

DIAVIK DIAMOND MINE MINERAL RESERVE AND MINERAL RESOURCE STATEMENT

59

HARRY WINSTON RETAIL SALONS AND DIAMOND SALES OFFICES

60

SHAREHOLDER INFORMATION

HARRY WINSTON DIAMOND CORPORATION

Highlights

(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)

Harry Winston Diamond Corporation achieved record consolidated sales for the year, generating a 35% increase in gross margin and a 48% increase in consolidated earnings from operations over the prior year. The Company’s consolidated sales for the year increased by 22% to $679.3 million with earnings from operations of $217.7 million, compared to $558.8 million and $146.8 million, respectively, for the prior year.

Net earnings were $106.4 million, or $1.82 per share, compared to net earnings of $104.3 million, or $1.79 per share, respectively, in the prior year. Net earnings for the year were reduced by a net $43.4 million foreign exchange loss, or $0.74 per share, compared to a net $8.8 million foreign exchange gain, or $0.15 per share, in the prior year. The loss is a result of the 17% strengthening of the Canadian dollar relative to the US dollar during the year.  

The mining segment posted a 24% annual increase in sales to $413.8 million, while the retail segment recorded a 17% increase in sales to $265.5 million. Earnings from operations for the mining segment increased 53% to $220.7 million. The retail loss from operations of $3.1 million compared to earnings from operations of $2.3 million in the prior year reflects increased investment for its continuing international salon expansion. The Company opened five new salons in fiscal 2008 compared to three in the prior year.

The Company’s share of diamond production at the Diavik Mine, which is recorded on a calendar basis, increased by 22% to 4.8 million carats for the year ended December 31, 2007, from 3.9 million carats for the prior year.

2008 ANNUAL REPORT

15

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Prepared as of April 15, 2008 (all figures are in United States dollars unless otherwise indicated)

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 fiscal year ended January 31, 2008, and its financial position as at January 31, 2008. This MD&A is based on the Company’s consolidated financial statements prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to “year” refer to the fiscal year of Harry Winston Diamond Corporation ended January 31. Unless otherwise indicated, references to “international” for the retail segment refer to Europe and Asia.

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

Caution Regarding Forward-Looking Information

Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding projected capital expenditure requirements, the operation of the Geneva watch factory, estimated reserves and resources at, and production from, the Diavik Mine, 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 Inc., expected gross margin and expense trends in the retail segment, expected diamond prices and expectations concerning the diamond industry. Actual results may vary. See “Risks and Uncertainties”.

Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Mine, the receipt of necessary regulatory approvals, world and US economic conditions, 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 for fiscal 2009, 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, the expected life of the Diavik Mine, future mining activity and mine plans, including plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Mine, and future rough diamond sales, Harry Winston Diamond Corporation has assumed, among other things, that mining operations, construction and exploration activities will proceed in the ordinary course according to schedule and consistent with past results. While Harry Winston Diamond Corporation considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See “Risks and Uncertainties”.

2008 ANNUAL REPORT

16

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

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 30 of this Annual Report, as well as Harry Winston Diamond Corporation’s current Annual Information Form, available at www.sedar.com, for a discussion of these and other risks and uncertainties involved in Harry Winston Diamond Corporation’s operations.

Readers are cautioned not to place undue importance on forward-looking information, which speaks only as of the date of this Management’s Discussion and Analysis, and should not rely upon this information as of any other date. Due to assumptions, risks and uncertainties, including the assumptions, risks and uncertainties identified above and elsewhere in this Management’s Discussion and Analysis, actual events may differ materially from current expectations. While Harry Winston Diamond Corporation may elect to, it is under no obligation and does not undertake to update or revise any forward-looking information, whether as a result of new information, future events or otherwise at any particular time, except as required by law. Additional information concerning factors that may cause actual results to materially differ from those in such forward-looking statements is contained in the Harry Winston Diamond Corporation’s filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov respectively.

Summary Discussion

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

Rough diamond prices remained strong throughout fiscal 2008. The upward trend in prices was particularly evident in the larger, better-quality ranges, which began the year positively and continued to rise throughout the year. This positive growth was also evident in smaller, high-quality rough diamonds driven by demand from the watch industry. After softening throughout fiscal 2007, demand for lower end goods experienced robust growth in the second half of fiscal 2008.

At the end of the year, the polished market showed strong sales growth in China, India and the Middle East which offset the more moderate demand from the US market. Prices rose in line with demand, with the lower-quality ranges of polished diamonds benefiting from the continuing scarcity of larger, better-quality goods.

The Retail Jewelry Market

In 2007, the global luxury diamond jewelry market, in which Harry Winston is positioned, experienced significant demand. Strong momentum from Chinese, Russian and Middle Eastern consumers more than offset a softness in spending from US customers as a result of the volatility in the US financial markets.    

In the broader retail jewelry market, where Harry Winston does not conduct business, sales were negatively impacted by the US economic downturn.

2008 ANNUAL REPORT

17

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Consolidated Financial Results

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

(expressed in thousands of United States dollars except per share amounts and where otherwise noted) (quarterly results are unaudited)
		2008		2008		2008		2008		2007		2007		2007		2007		2008		2007
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total
Sales	$	188,195	$	176,478	$	173,269	$	141,365	$	154,328	$	145,232	$	139,962	$	119,271	$	679,307	$	558,793
Cost of sales		83,637		74,591		81,827		71,132		78,559		74,636		68,458		63,845		311,187		285,498
Gross margin		104,558		101,887		91,442		70,233		75,769		70,596		71,504		55,426		368,120		273,295
Gross margin (%)		55.6%		57.7%		52.8%		49.7%		49.1%		48.6%		51.1%		46.5%		54.2%		48.9%
Selling, general and administrative expenses		45,494		35,539		35,201		34,211		38,590		33,480		27,171		27,295		150,445		126,536
Earnings from operations		59,064		66,348		56,241		36,022		37,179		37,116		44,333		28,131		217,675		146,759
Interest and financing expenses		(7,082)		(7,422)		(7,222)		(6,132)		(6,441)		(5,570)		(4,805)		(4,334)		(27,858)		(21,150)
Other income (expense)		706		594		545		913		(111)		1,764		1,805		1,623		2,758		5,081
Insurance settlement		13,488		–		–		–		–		–		–		–		13,488		–
Foreign exchange gain (loss)		22,270		(40,584)		(11,785)		(13,292)		9,831		(1,560)		2,619		(2,106)		(43,391)		8,784
Earnings before income taxes		88,446		18,936		37,779		17,511		40,458		31,750		43,952		23,314		162,672		139,474
Income taxes (recovery)		(1,968)		26,197		17,747		14,118		13,169		13,005		9,692		(1,036)		56,094		34,830
Earnings (loss) before minority interest		90,414		(7,261)		20,032		3,393		27,289		18,745		34,260		24,350		106,578		104,644
Minority interest		(34)		90		(26)		140		(5)		(86)		(5)		471		170		375
Net earnings (loss)	$	90,448	$	(7,351)	$	20,058	$	3,253	$	27,294	$	18,831	$	34,265	$	23,879	$	106,408	$	104,269
Basic earnings  (loss) per share	$	1.55	$	(0.13)	$	0.34	$	0.06	$	0.47	$	0.32	$	0.59	$	0.41	$	1.82	$	1.79
Diluted earnings (loss) per share	$	1.54	$	(0.13)	$	0.33	$	0.05	$	0.46	$	0.32	$	0.58	$	0.40	$	1.81	$	1.76
Cash dividends declared per share	$	0.05	$	0.25	$	0.25	$	0.25	$	0.25	$	0.25	$	0.25	$	0.25	$	0.80	$	1.00
Total assets(i)	$	1,494	$	1,433	$	1,367	$	1,315	$	1,288	$	1,246	$	1,116	$	1,111	$	1,494	$	1,288
Total long-term liabilities(i)	$	660	$	530	$	486	$	408	$	536	$	530	$	460	$	460	$	660	$	536

(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 sales events conducted 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. See “Segmented Analysis” on page 22 for additional information.

Year Ended January 31, 2008 Compared to Year Ended January 31, 2007

Consolidated Net Earnings

Harry Winston Diamond Corporation’s net earnings for the fiscal year ended January 31, 2008 totalled $106.4 million or $1.82 per share, compared to net earnings of $104.3 million or $1.79 per share for the prior year. Net earnings were impacted by a net $43.4 million foreign exchange loss, or $0.74 per share, related primarily to an unrealized non-cash loss on future income taxes as compared to a net foreign exchange gain of $8.8 million, or $0.15 per share, in the prior year. Also impacting results are a future income tax recovery of $23.3 million or $0.40 per share compared to $17.0 million or $0.29 cents per share in the prior year and an after-tax gain on insurance settlement of $8.0 million or $0.14 per share that resulted from a robbery at the Harry Winston Paris salon in the third quarter. For more detail on the impact of the foreign exchange loss on future income taxes payable and the future income tax recovery, see “Consolidated Income Taxes” on page 19.

Consolidated Sales

The Company recorded sales for the fiscal year ended January 31, 2008 of $679.3 million compared to sales of $558.8 million for the prior year. On a segment basis, rough diamond sales accounted for $413.8 million of these sales compared to $332.6 million for the prior year. The Company completed ten rough diamond sales during the fiscal year, consistent with the prior year. Harry Winston’s retail segment sales were $265.5 million, compared to $226.2 million for the prior year.

Consolidated Cost of Sales and Gross Margin

The Company recorded cost of sales of $311.2 million for a gross margin of 54.2% during the fiscal year compared to $285.5 million and a gross margin of 48.9% during the prior year. The Company’s cost of sales includes costs associated with mining, sorting and retail activities. See “Segmented Analysis” on page 22 for additional information.

2008 ANNUAL REPORT

18

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

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. Harry Winston Diamond Corporation incurred SG&A expenses of $150.4 million for the year compared to $126.5 million for the prior year. The increase of $23.9 million in SG&A expenses from the prior year is primarily due to an increase of $7.4 million in salaries and benefits, $6.5 million in advertising and selling expenses, $6.2 million in rent and building related expenses, and $3.7 million in amortization expense. Included in 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.

SG&A expenses for the current year included $23.3 million for the mining segment and $127.1 million for the retail segment as compared to $21.2 million and $105.3 million, respectively, for the prior year. 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 opening five new salons and refurbishing two existing salons during the year.

Consolidated Income Taxes

The Company recorded a tax expense of $56.1 million during the twelve months ended January 31, 2008, compared to $34.8 million for the prior fiscal year. The Company’s effective income tax rate for the fiscal year ended January 31, 2008, excluding Harry Winston’s retail segment, is 33%, which is based on a statutory income tax rate of 34% adjusted for various items including the Northwest Territories mining royalty, impact of foreign exchange, impact of changes in future income tax rates, earnings subject to tax different than the statutory rate, and assessments and adjustments. During the current fiscal year, Harry Winston Diamond Corporation recorded a future tax recovery of $11.7 million as a result of the decrease in federal corporate income tax rates. This compares to a future tax recovery of $17.0 million in the prior year as a result of the decrease in Northwest Territories and federal corporate income tax rates and the elimination of federal surtax. In addition, the Company reached a settlement with tax authorities during the current fiscal year on tax reassessments related to prior years’ tax filings, resulting in a recovery of $11.6 million of future taxes that were previously recorded in prior years.

The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. The strengthening of the Canadian dollar versus the US dollar from January 31, 2007 to January 31, 2008 resulted in an unrealized foreign exchange loss of $37.0 million on the revaluation of the Canadian dollar denominated future income tax liability. This unrealized foreign exchange loss is not deductible for Canadian income tax purposes.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 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:

	Year ended January 31, 2008		Year ended January 31, 2007
Statutory income tax rate	34	%	37	%
Stock compensation	0	%	1	%
Northwest Territories mining royalty (net of income tax relief)	12	%	9	%
Impact of foreign exchange	6	%	(6)	%
Impact of changes in future income tax rates	(7)	%	(12)	%
Earnings subject to tax different than statutory rate	(3)	%	(5)	%
Changes in valuation allowance	(2)	%	0	%
Benefits of losses recognized through reduction of goodwill	3	%	1	%
Assessments and adjustments	(7)	%	0	%
Other items	(2)	%	0	%
Effective income tax rate	34	%	25	%

Consolidated Interest and Financing Expenses

Interest and financing expenses of $27.9 million were incurred during the fiscal year compared to $21.2 million for the prior 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 at Harry Winston Diamond Corporation to finance its acquisition of the remaining portion of Harry Winston Inc. in September 2006.

2008 ANNUAL REPORT

19

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Consolidated Other Income

Other income, which includes interest income on the Company’s various bank balances, was $2.8 million during the year compared to $5.1 million in the prior year. The reduction in other income is due to higher cash balances held in the prior year in advance of the Harry Winston Inc. acquisition.

Consolidated Insurance Settlement

During the third quarter of fiscal 2008, approximately $23.2 million in Company-owned retail inventory at cost was stolen during a robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $13.5 million in the fourth quarter on settlement of the insurance claim.  

Consolidated Foreign Exchange Gain (Loss)

A net foreign exchange loss of $43.4 million was recognized during the fiscal year compared with a net gain of $8.8 million recognized during the prior year. The current year loss is comprised of a realized foreign exchange gain of $1.8 million and an unrealized, non-cash loss of $45.2 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 year 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.

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

Consolidated Net Earnings

The fourth quarter earnings of $90.4 million or $1.55 per share represent an increase of $63.1 million or $1.08 per share as compared to the results of the fourth quarter of the prior year. In addition to improved operating results, the increase is due to a $22.3 million foreign exchange gain or $0.38 per share related principally to an unrealized non-cash gain on future income taxes payable as compared to a foreign exchange gain of $9.8 million or $0.17 per share in the comparable quarter of the prior year. Also impacting the fourth quarter are an after-tax gain on insurance settlement of $8.0 million or $0.14 per share that resulted from a robbery at the Harry Winston Paris salon in the third quarter and a future income tax recovery of $22.4 million or $0.38 per share. For more detail on the impact of the foreign exchange gain on future income taxes payable and the future income tax recovery, see “Consolidated Income Taxes” on page 21.

Consolidated Sales

Sales for the fourth quarter totalled $188.2 million, consisting of rough diamond sales of $103.2 million and retail segment sales of $85.0 million. This compares to sales of $154.3 million in the comparable quarter of the prior year (rough diamond sales of $81.0 million and retail segment sales of $73.3 million). The Company held two primary rough diamond sales in the fourth quarter compared to three in the comparable quarter of the prior year. 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 fourth quarter cost of sales was $83.6 million for a gross margin of 55.6% compared to $78.6 million cost of sales and gross margin of 49.1% for the comparable quarter of the prior year. 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 22 for additional information.

Consolidated Selling, General and Administrative Expenses

The principal components of SG&A expenses include expenses for salaries and benefits (including salon personnel), advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of $45.5 million for the fourth quarter, compared to $38.6 million in the comparable quarter of the prior year.

Included in SG&A expenses for the fourth quarter are $5.7 million for the mining segment as compared to $7.4 million for the comparable quarter of the prior year, and $39.8 million for the retail segment as compared to $31.2 million for the comparable quarter of the prior year. For the mining segment, the decrease was due to a mark-to-market adjustment to stock-based compensation. For the retail segment, the increase was as a result of our continued investment in the Harry Winston brand and the expansion of our retail salon base, and reflected an increase in salaries and benefits, advertising and selling expenses, rent and building related expenses and depreciation and amortization expense. See “Segmented Analysis” on page 22 for additional information.

2008 ANNUAL REPORT

20

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Consolidated Income Taxes

Harry Winston Diamond Corporation recorded a net tax recovery of $2.0 million during the fourth quarter compared to a tax expense of $13.2 million in the comparable quarter of the prior year. The net tax recovery includes a future income tax recovery of $10.8 million as a result of the decrease in federal corporate income tax rates. It also includes a future income tax recovery of $11.6 million as a result of a settlement with tax authorities on tax reassessments related to prior years’ tax filings. In addition, the Canadian dollar weakened against the US dollar during the fourth quarter. As a result, the Company recorded an unrealized foreign exchange gain of $17.7 million on the revaluation of the Canadian dollar denominated future income tax liability, which is not taxable for Canadian income tax purposes. All of these factors contributed to an overall net tax recovery in the current quarter.

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 months ended January 31, 2008		Three months ended January 31, 2007
Statutory income tax rate	34	%	37	%
Stock compensation	(1)	%	2	%
Northwest Territories mining royalty (net of income tax relief)	6	%	9	%
Impact of foreign exchange	(11)	%	(14)	%
Impact of changes in future income tax rates	(12)	%	0	%
Earnings subject to tax different than statutory rate	(1)	%	(5)	%
Changes in valuation allowance	(4)	%	0	%
Benefits of losses recognized through reduction of goodwill	3	%	2	%
Assessments and adjustments	(15)	%	0	%
Other items	(1)	%	2	%
Effective income tax rate	(2)	%	33	%

Consolidated Interest and Financing Expenses

Interest and financing expenses of $7.1 million were incurred during the fourth quarter compared to $6.4 million during the comparable quarter of the prior year.

Consolidated Other Income (Expense)

Other income of $0.7 million was recorded during the quarter compared to other expense of $0.1 million in the comparable quarter of the prior year. Other expense in the prior year included a write-off of $0.9 million on an investment net of interest income on the Company’s various bank balances.

Consolidated Insurance Settlement

During the third quarter of fiscal 2008, approximately $23.2 million in Company-owned retail inventory at cost was stolen during a robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $13.5 million in the fourth quarter on settlement of the insurance claim.

Consolidated Foreign Exchange Gain

A net foreign exchange gain of $22.3 million was recognized during the quarter compared to $9.8 million in the comparable quarter of the prior year. The gains relate principally to the revaluation of the Company’s Canadian dollar denominated long-term future income tax liability as a result of the weakening of the Canadian dollar against the US dollar at year 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.

2008 ANNUAL REPORT

21

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Segmented Analysis

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

Mining

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

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

		2008		2008		2008		2008		2007		2007		2007		2007		2008		2007
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total
Sales	$	103,238	$	122,711	$	105,071	$	82,752	$	81,035	$	90,754	$	91,476	$	69,308	$	413,772	$	332,573
Cost of sales		36,962		45,985		46,217		40,516		39,413		45,461		43,256		38,749		169,680		166,879
Gross margin		66,276		76,726		58,854		42,236		41,622		45,293		48,220		30,559		244,092		165,694
Gross margin (%)		64.2%		62.5%		56.0%		51.0%		51.4%		49.9%		52.7%		44.1%		59.0%		49.8%
Selling, general and  administrative expenses		5,663		6,748		5,861		5,087		7,397		4,665		4,373		4,787		23,359		21,222
Earnings from operations	$	60,613	$	69,978	$	52,993	$	37,149	$	34,225	$	40,628	$	43,847	$	25,772	$	220,733	$	144,472

Year Ended January 31, 2008 Compared to Year Ended January 31, 2007

Mining Sales

Rough diamond sales for the year totalled $413.8 million compared to $332.6 million in the prior year resulting from a combination of higher grade and pricing as well as increased diamond recovery. The Company completed ten rough diamond sales during the fiscal year, consistent with the prior year.

Mining Cost of Sales and Gross Margin

The Company’s cost of sales for the fiscal year was $169.7 million for a gross margin of 59.0% compared to $166.9 million cost of sales and gross margin of 49.8% in the prior year. The increase in the gross margin percentage was driven by higher carat production, reflecting both higher grade and enhanced diamond recovery resulting from processing improvements.

A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Mine. The prior year was negatively impacted by higher 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, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

Mining Selling, General and Administrative Expenses

SG&A expenses for the mining segment increased by $2.1 million from the prior year primarily due to the continued development of our global selling, marketing and administrative operations.

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

Mining Sales

Rough diamond sales for the quarter totalled $103.2 million compared to $81.0 million in the comparable quarter of the prior year resulting from a combination of higher grade and pricing as well as increased diamond recovery. The Company held two primary rough diamond sales in the fourth quarter compared to three in the comparable quarter 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

The Company’s fourth quarter cost of sales was $37.0 million for a gross margin of 64.2% compared to $39.4 million cost of sales and gross margin of 51.4% in the comparable quarter of the prior year. The increase in the gross margin percentage was 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.

A substantial portion of cost of sales is mining operating costs, which are incurred at the Diavik Mine. Prior year 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, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

Mining Selling, General and Administrative Expenses

SG&A expenses for the mining segment decreased by $1.7 million from the comparable period of the prior year due to a mark-to-market adjustment to stock-based compensation.

2008 ANNUAL REPORT

22

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Retail

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

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

		2008		2008		2008		2008		2007		2007		2007		2007		2008		2007
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total
Sales	$	84,957	$	53,767	$	68,198	$	58,613	$	73,293	$	54,478	$	48,486	$	49,963	$	265,535	$	226,220
Cost of sales		46,675		28,606		35,610		30,616		39,146		29,175		25,202		25,096		141,507		118,619
Gross margin		38,282		25,161		32,588		27,997		34,147		25,303		23,284		24,867		124,028		107,601
Gross margin (%)		45.1%		46.8%		47.8%		47.8%		46.6%		46.4%		48.0%		49.8%		46.7%		47.6%
Selling, general and  administrative expenses		39,831		28,791		29,340		29,124		31,193		28,815		22,798		22,508		127,086		105,314
Earnings (loss) from operations	$	(1,549)	$	(3,630)	$	3,248	$	(1,127)	$	2,954	$	(3,512)	$	486	$	2,359	$	(3,058)	$	2,287

Year Ended January 31, 2008 Compared to Year Ended January 31, 2007

Retail Sales

Salon sales for the fiscal year ending January 31, 2008 were $265.5 million compared to $226.2 million for the prior year. The increase of 17% was supported by the opening of five new salons during the year as well as strong demand from Chinese, Russian and Middle Eastern customers for high-end jewelry and watches. Sales in the Asian market increased 35% from $53.1 million to $71.7 million, US sales increased 15% from $98.0 million to $112.5 million and European sales rose 8% from $75.1 million to $81.4 million. European sales were impacted by the temporary business disruption late in the third quarter and early in the fourth quarter relating to the Paris salon robbery that occurred in October 2007.

Retail Cost of Sales and Gross Margin

Cost of sales for Harry Winston Inc. for the year was $141.5 million compared to $118.6 million for the prior year. Gross margin for the year was $124.0 million or 46.7% compared to $107.6 million or 47.6% for the prior year. Excluding the impact of sales of Harry Winston Inc. pre-acquisition inventory, the gross margin for the year and the prior year would have been 50.3% and 50.7%, respectively.

Retail Selling, General and Administrative Expenses

With the expansion of the new international salon activity consistent with the retail growth strategy, SG&A expenses for the year increased to $127.1 million or 47.9% of revenue as compared to $105.3 million or 46.6% of revenue in the prior year. This increase was primarily due to the opening of five salons and refurbishing of two salons in fiscal 2008, including an increase in salaries and benefits of $8.3 million, a $6.5 million increase in advertising and selling expenses, an increase in rent and building related expenses of $6.5 million, an increase in depreciation and amortization expense of $3.2 million and an increase in office expenses of $1.5 million. The SG&A expenses as a percentage of revenue for fiscal 2008 was also negatively impacted by the business disruption resulting from the Paris salon robbery that occurred in October 2007. Included in 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 $9.3 million compared to $6.2 million in the prior year.

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

Retail Sales

Salon sales for the fourth quarter were $85.0 million compared to $73.3 million for the comparable quarter of the prior year. The 16% increase in Harry Winston sales relative to the comparable quarter of the prior year is primarily attributed to the opening of two flagship salons in Chicago and Nagoya, Japan. Strong momentum in emerging markets such as China and Russia supported the positive results despite the challenging US economic environment. Sales in the Asian market increased 46% to $21.0 million, US sales increased 38% to $46.5 million, offset by a 31% decrease in European sales to $17.4 million due primarily to the temporary business disruption late in the third quarter and early in the fourth quarter relating to the Paris salon robbery that occurred in October 2007.

Retail Cost of Sales and Gross Margin

Cost of sales for Harry Winston Inc. for the fourth quarter was $46.7 million compared to $39.1 million for the comparable quarter of the prior year. Gross margin for the quarter was $38.3 million or 45.1% compared to $34.1 million or 46.6% for the fourth quarter of the prior year. Excluding the impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin for the fourth quarter and the comparable quarter of the prior year would have been 47.4% and 51.8%, respectively. Gross margins for the fourth quarter were impacted by two significant sales which generated lower margins. One of these sales to the Russian market involved a wide range of jewelry items to increase awareness of the Harry Winston brand in this market where demand for luxury brands has grown rapidly over the past several years.

2008 ANNUAL REPORT

23

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Retail Selling, General and Administrative Expenses

With the expansion of the new international salon activity consistent with the retail growth strategy, SG&A expenses increased to $39.8 million or 46.9% of revenue in the fourth quarter as compared to $31.2 million or 42.6% of revenue in the comparable quarter of the prior year. This increase was primarily due to an increase in rent and building related expenses of $2.5 million, an increase in salaries and benefits of $2.1 million, and an increase in advertising and selling expenses of $2.0 million. The SG&A expenses as a percentage of revenue for the current fourth quarter was also negatively impacted by the business disruption resulting from the Paris salon robbery that occurred in October 2007. SG&A expenses include depreciation and amortization expense of $3.2 million compared to $2.4 million in the comparable quarter of the prior year.

Operational Update

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

Mining Segment

Annual production at the Diavik Mine reached a record 11.9 million carats for the calendar year ended December 31, 2007, representing an increase of 22% over the prior year. The increase in diamond production resulted from both higher grade and increased diamond recovery due to processing improvements.

Ore production for the fourth calendar quarter of 2007 was all from the high-grade A-154 South kimberlite pipe with 2.9 million carats produced from 0.58 million tonnes.

On March 14, 2008, the Company announced an updated ore reserve and resource statement and mine plan for the Diavik Mine. As a result of the new mine plan, underground mining is projected to begin at the Diavik Mine in 2009. The diversity of both open pit and underground mining areas will secure the Diavik Mine’s ability to maintain production through seasonal changes.  

The first phase of the underground mine development of the A-154 South, A-154 North and A-418 kimberlite pipes has been substantially completed. At present, production principally comes from A-154 South open pit with A-418 being prepared for open pit mining in calendar 2008.  

The Company expects to contribute approximately $221 million for capital expenditures to the Diavik Mine over the next two years at a Canadian/US dollar average exchange rate of $0.99 in support of the new mine plan’s underground development. It is expected that the funds will come from a combination of cash from operations, proceeds from a recent common share private placement and a refinancing of the Company’s existing credit facility.

The federal government recently approved the renewal of the Diavik Mine water license for a period of eight years, effective from November 1, 2007. The regional Wek’eezhii Land and Water Board, created under the Tli Cho land claim agreement, recommended license renewal after an intensive two-year public review. The license was granted subject to increased environmental monitoring, reporting and management controls.

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

(reported on a one-month lag)

	Three months ended December 31, 2007	Three months ended December 31, 2006	Twelve months ended December 31, 2007	Twelve months ended December 31, 2006
Diamonds recovered (000s carats)	1,177	997	4,777	3,931
Grade (carats/tonne)	5.06	4.91	4.97	4.21

Retail Segment

For the fiscal year, the retail segment generated strong double-digit growth in sales and maintained healthy underlying gross margins. Harry Winston Inc. increased its salon network to 18 salons around the world from 13 in the prior year. During the year the retail segment consolidated its watch manufacturing operations into a new facility located in Geneva, Switzerland. The new facility will provide manufacturing capacity to support the future growth of the watch business.

Harry Winston Inc. delivered strong revenue growth over the comparable quarter of the prior year. Gross margins were impacted by two significant sales which generated lower margins. One of these sales to the Russian market involved a wide range of jewelry items to increase awareness of the Harry Winston brand in this market where demand for luxury brands has grown rapidly over the past several years. Strong holiday sales of traditional Harry Winston retail products as well as new collections introduced in the current year were both major contributors to the results.

New salon openings in fiscal 2008 included, Tokyo (Roppongi), Beijing, Hong Kong, Chicago and Nagoya.

2008 ANNUAL REPORT

24

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Liquidity and Capital Resources

Working Capital

As at January 31, 2008, Harry Winston Diamond Corporation had unrestricted cash and cash equivalents of $49.6 million and contingency cash collateral and reserves of $25.6 million as required under the Company’s debt arrangements, compared to $54.2 million and $51.4 million, respectively, at January 31, 2007. The Company had cash on hand and balances with banks of $33.0 million and short-term investments of $16.6 million at January 31, 2008 compared to $44.4 million and $9.8 million, respectively, at January 31, 2007. The short-term investments were held in overnight deposits. Total cash resources at January 31, 2008 were $30.4 million lower than $105.6 million at January 31, 2007, resulting primarily from additional Joint Venture cash calls to support the development of underground mining.

Working capital increased to $220.0 million at January 31, 2008 from $164.0 million at January 31, 2007.  

The Company’s working capital fluctuates depending on the seasonality of production at the Diavik Mine, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Mine in each quarter along with the seasonality of the retail segment. The Company’s cash requirements are driven by differences in the timing of cash receipts and the cash outflows. The Company has the ability to draw on its various credit facilities to finance these timing differences.

Cash Flow from Operations

For the year ended January 31, 2008, Harry Winston Diamond Corporation generated $193.9 million in cash from operations, compared to $177.6 million in the prior year.

During the fiscal year, the Company purchased inventory of $48.5 million, increased prepaid expenses and other current assets by $32.8 million, increased income taxes payable by $30.2 million, increased accounts payable and accrued liabilities by $9.6 million and increased accounts receivable by $8.6 million.

The liquidity and capital requirements vary by quarter for the Company depending on the seasonal and production variability of its mining and retail segments. Timing differences in cash flow are financed by drawing down on the Company’s credit facilities. Over the course of a fiscal year, the Company does not expect the fluctuations to be material. Over the next two fiscal years, capital requirements for the mining segment are expected to increase significantly in accordance with the expected investment program at the Diavik Mine. Thereafter, capital requirements for the mining segment are expected to moderate and the mining segment is expected to generate sufficient cash flow to finance its operations and capital expenditure requirements. The capital requirements for the retail segment are ordinary in course and are not expected to fluctuate materially over the next few years. The retail segment will finance its operations and capital requirements during these years from operating cash flow and its credit facilities.

Financing Activities

During the year, Harry Winston Diamond Corporation repaid $19.3 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 January 31, 2008, the Company had $76.4 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 January 31, 2008, Harry Winston Inc. had $154.0 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 $42.0 million from the amount outstanding at January 31, 2007. On February 22, 2008, Harry Winston Inc. entered into a new credit agreement with a syndicate of banks for a $250.0 million, five-year revolving credit facility.

Also included in long-term debt of the Company’s retail operations is a 25-year loan agreement for 17.5 million CHF used to finance the construction of the new watch factory in Geneva, Switzerland. At January 31, 2008, $16.1 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 secured and unsecured credit agreements with three banks amounting to ¥2,075 million. At January 31, 2008, $19.4 million had been drawn against these facilities, $4.7 million of which is long term, payable on June 28, 2010, with the balance of $14.7 million classified as bank advances.  At January 31, 2007, $5.8 million drawn against the unsecured facilities was classified as bank advances.

At January 31, 2008, $10.5 million and $9.4 million were drawn under the Company’s revolving financing facilities relating to its Belgian subsidiary, Harry Winston Diamond International N.V. (formerly Aber International N.V.) and its Israeli subsidiary, Harry Winston Diamond (Israel) Limited (formerly Aber Diamond Israel 2006 Ltd.), respectively. At January 31, 2007, $18.4 million and $5.6 million were drawn under the Company’s revolving financing facilities relating to Harry Winston Diamond International N.V. and Harry Winston Diamond (Israel) Limited, respectively.

During the fiscal year, the Company made dividend payments of $46.7 million or $0.80 per share to its shareholders.  

2008 ANNUAL REPORT

25

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

On March 14, 2008, the Company completed a 3 million common share private placement. The non-brokered private placement sold 3 million common shares at CDN $25 per share. No fees or commissions were payable on this transaction which generated net proceeds of CDN $75.0 million. This transaction diluted the Company’s issued and outstanding shares by 5%.

Investing Activities

During the fiscal year, the Company purchased capital assets of $201.8 million, of which $163.3 million were purchased for the mining segment and $38.5 million for the retail segment. Also included in deferred mineral property costs were purchases of $7.5 million made during the fiscal year.

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 capital expenditures for the calendar years 2008 to 2012, is approximately $320 million assuming a Canadian/US average exchange rate of $0.96 for the five years. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:

Contractual Obligations				Less than		Year		Year		After
(expressed in thousands of United States dollars)		Total		1 year		2–3		4–5		5 years
Long-term debt (a) (b)	$	385,867	$	71,628	$	110,248	$	27,371	$	176,620
Environmental and participation agreements
incremental commitments (c)		97,366		76,504		3,985		1,992		14,885
Operating lease obligations (d)		121,959		16,197		29,303		17,849		58,610
Capital lease obligations (e)		2,315		872		1,307		136		–
Total contractual obligations	$	607,507	$	165,201	$	144,843	$	47,348	$	250,115

(a)

Long-term debt presented in the foregoing table includes current and long-term portions. The Company’s credit agreements are comprised of two senior secured term credit facilities and a senior secured revolving credit facility. 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 January 31, 2008, $76.4 million in total was outstanding on the senior secured term credit facilities, and $50.0 million was outstanding on the senior secured revolving credit facility. Scheduled repayments on the senior secured term credit facilities commenced March 15, 2008 with $12.5 million in repayments due every quarter. The maximum amount permitted to be drawn under the senior secured revolving credit facility will be reduced by $12.5 million on a quarterly basis commencing March 15, 2009.  

The Company’s first mortgage on real property has scheduled principal payments of approximately $0.1 million quarterly, and may be prepaid after 2009. On January 31, 2008, $8.8 million was outstanding on the mortgage payable.

At January 31, 2008, $154.0 million had been drawn against Harry Winston Inc.’s $200.0 million secured credit facility which expires on March 31, 2008. On February 22, 2008, Harry Winston Inc. entered into a new credit agreement with a syndicate of banks for a $250.0 million, five-year revolving credit facility. There are no scheduled repayments required before maturity.

Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for 17.5 million CHF used to finance the construction of the new watch factory in Geneva, Switzerland. The bank has a secured interest in the factory building. The loan bears interest at a rate of 3.55% and matures on January 31, 2033, with quarterly payments commencing on June 30, 2008.

(b)

Interest on long-term debt is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at January 31, 2008 and have been included under long-term debt in the table above.  Interest payments for fiscal 2009 are approximated to be $17.5 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 January 31, 2008 was $61.5 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 $61.5 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. 

2008 ANNUAL REPORT

26

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

(d)

Operating lease obligations represent future minimum annual rentals under non-cancellable operating leases for Harry Winston salons and office space. Harry Winston Inc.’s New York salon lease expires on December 17, 2010 with an option to renew.

(e)

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

Outlook

Mining

A new mine plan approved in the fourth quarter by both Rio Tinto plc, the operator of the Diavik Mine, and the Company secures the future of the Diavik Project to beyond 2020 and sets the foundation for the transition from open pit to underground mining over the next five years. This mine plan currently excludes the development of the A-21 kimberlite pipe. A bulk sample from the A-21 kimberlite pipe is expected in calendar 2008 to provide a definitive planning price for A-21 rough diamonds.  

Production

Rough diamond production is expected to reach a record annual level in the 2008 calendar year. The Diavik Mine is forecasted to deliver approximately 12 million carats in calendar 2008, predominately sourced from the high-grade A-154 South kimberlite pipe. Depletion of the A-154 South open pit ore is expected in December 2008. Pre-stripping of the A-418 kimberlite pipe will continue into 2008, with commercial production anticipated during the second calendar quarter.  

In calendar years 2009 and 2010, the lower-grade A-418 kimberlite pipe will become the primary ore source, with open pit production scheduled to end in calendar 2011. Underground production is expected to commence in 2009, sourced from A-154 South, A-154 North and A-418 simultaneously. The three kimberlite pipes are located in relative proximity to one another, allowing a common underground infrastructure.

Processing plant throughput is expected to remain at 2.3 million tonnes of kimberlite per year. Underground ore volumes are expected to increase steadily beginning in 2009 as underground mining ramps up and open pit volumes decline. In the absence of A-21, underground mining would be the sole source of production from 2012 onwards.

Average recovered grade is forecasted to be approximately 5.7 carats/tonne of ore processed in calendar 2008, and approximately 3.5 carats/tonne thereafter. The Company has commissioned WWW Diamond Consultants Ltd. (“WWW”) to provide an independent view of diamond prices for the proven and probable reserve categories based on the examination of both production and bulk sample diamond parcels. As of January 2008, WWW modelled and assigned diamond prices of $93 per carat to A-154 South, $117 to A-154 North and $85 to A-418.

Cost of Sales

In calendar 2008, cost of sales is expected to increase approximately 25% compared to calendar 2007 primarily due to an anticipated stronger Canadian dollar, higher labour, fuel, material costs and higher depreciation. Cost of sales is forecasted to peak in calendar 2009 at a further 30% over calendar 2008 reflecting the higher costs associated with the overlap of underground and open pit mining. Thereafter, open pit mining volumes are projected to decrease with the transition to solely underground mining. Accordingly, over the following two years cost of sales is also expected to decline as the overlap between open pit and underground mining diminishes.

Capital Expenditures

Over the next five years, the Company’s portion of planned capital expenditures is expected to be approximately $320 million at a Canadian/US dollar average exchange rate of $0.96. The Company expects to contribute approximately $221 million over the next two years at a Canadian/US dollar average exchange rate of $0.99 in support of the underground development project. Financing for the two-year period is expected from a combination of cash from operations, proceeds from a recent common share private placement and refinancing of the Company’s existing credit facility.

In addition to constructing over 20 km of underground tunnelling and raisebore shafts, underground facilities will include maintenance shops and warehousing for mobile equipment servicing, refuge stations, fuelling areas, electrical power distributions, communication networks, water handling and pumping systems, ore and waste loading areas and ventilations.

To support the underground development and construction phase, more camp accommodations for an expanding workforce is required in addition to several large surface facilities. These facilities include a crushing and paste plant to produce backfill, expansion of the processed kimberlite containment dam, power generation expansion, and fuel storage capacity. Construction of these facilities began in calendar 2007 and completion is expected in 2008.

2008 ANNUAL REPORT

27

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Exploration

Accelerated exploration activities are planned over the next two years on existing property holdings. None of the exploration activities has any impact on the Diavik mineral resources and mineral reserves at this time. As underground mining advances to greater depths in the coming years, resource classifications will be upgraded through additional drilling, which might add production volume or longevity to the mine life.

Rough Diamond Sales Cycle

The rough diamond sales cycle in the coming year is expected to be two primary sales in the first quarter including an open-market tender, two in the second quarter, two in the third quarter and three in the fourth. Sales are now conducted throughout the quarter in each of the Company’s three selling offices located in Belgium, Israel and India.  

Cash Tax Profile

The Company has been able to defer the majority of its cash income taxes since the Diavik Mine began commercial production in fiscal 2004, as accelerated tax deductions were available from its initial investments in the mine. Accordingly, the Company has recorded a significant future income tax liability. As the accelerated tax deductions become fully utilized, the Company expects an increase in current income tax payable and a reversal in future income tax liability beginning in fiscal 2009. The Company anticipates that a significant portion of the existing future income tax liability will reverse over the next two years, with the highest cash tax payment anticipated in fiscal 2010.

Retail

The high-end luxury goods industry has historically been more resilient to economic fluctuations than general retail. With a diverse global distribution network, the retail segment is positioned to withstand regional economic disruptions. Volatility in the US financial markets is expected to be offset by continued strong demand for high-end diamond jewelry and watches from markets in China, Russia and the Middle East.

Harry Winston Inc. will continue to support its expanded salon network and introduce new limited hand-crafted jewelry designs using the highest quality of diamonds in the upcoming year. In addition, new jewelry collections will be introduced to expand product assortment. Harry Winston Inc. remains well positioned to continue to leverage its brand equity in support of future sales growth. One store is scheduled to be opened in Costa Mesa, California in fiscal 2009.

In fiscal 2009, Harry Winston Inc. expects to continue to record double-digit sales growth and strong underlying gross margins, resulting in an improvement in earnings from operations.

Related Parties

Transactions with related parties for the year ended January 31, 2008 include $1.8 million of rent (2007 – $1.8 million) relating to the New York salon, payable to a Harry Winston Inc. employee.

Disclosure Controls and Procedures

The Company has designed a system of disclosure controls and procedures to provide reasonable assurance that material information relating to Harry Winston Diamond Corporation, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the Company’s annual filings are being prepared. In designing and evaluating the disclosure controls and procedures, the management of the Company recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The management of Harry Winston Diamond Corporation was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The result of the inherent limitations in all control systems means no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

The management of Harry Winston Diamond Corporation has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by the Annual Report. Based on that evaluation, management has concluded that these disclosure controls and procedures, as defined in Canada by Multilateral Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are effective at January 31, 2008 to ensure that information required to be disclosed in reports that the Company will file or submit under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in those rules and forms.

Internal Control over Financial Reporting

The certifying officers of Harry Winston Diamond Corporation have designed a system of internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian GAAP and the requirements of the Securities and Exchange Commission in the United States, as applicable. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, including its consolidated subsidiaries.

2008 ANNUAL REPORT

28

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Management has evaluated the effectiveness of internal control over financial reporting using the framework and criteria established in the Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of January 31, 2008.

Changes in Internal Control over Financial Reporting

During the fourth quarter of fiscal 2008 there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Critical Accounting Estimates

Management is often required to make judgments, assumptions and estimates in the application of Canadian generally accepted accounting principles that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company’s reported results or financial position. The following discussion outlines the accounting policies and practices that are critical to determining Harry Winston Diamond Corporation’s financial results.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of earnings, revenues and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the determination of impairment of capital assets, intangible assets, goodwill and deferred mineral property costs, estimation of future site restoration costs and future income taxes. Financial results as determined by actual events could differ from those estimated.

The most significant estimates relate to the valuation of deferred mineral property costs and future site restoration costs. Management makes significant estimates related to the measurement of reclamation obligations and the timing of the related cash flows and future income tax liabilities. Such timing and measurement uncertainty could have a material effect on the reported results of operations and the financial position of the Company.

Actual results could differ materially from those estimates in the near term.

Deferred Mineral Property Costs and Mineral Reserves

Harry Winston Diamond Corporation capitalizes all direct development and pre-production costs relating to mineral properties and amortizes such costs on a unit-of-production basis upon commencement of commercial production relating to the underlying property. The Company has determined that commercial production related to the Diavik Mine was achieved during the fiscal year ended January 31, 2004. Deferred mineral property costs are amortized based on estimated proven and probable reserves at the property.

On an ongoing basis, the Company evaluates deferred costs relating to each property to ensure that the estimated recoverable amount exceeds the carrying value. Based on the Diavik Mine’s latest projected open pit and underground life from the mine plan and diamond prices from the Diavik Project feasibility study, there is no requirement to write down deferred mineral property costs.

The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates can be revised upward or downward based on the results of future drilling, testing or production levels, and diamond prices. Changes in reserve estimates can impact the evaluation of net recoverable deferred costs.

Future Site Restoration Costs

The Company has obligations for future site restoration costs. The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company adopted Section 3110, “Accounting for Asset Retirement Obligations”, effective November 1, 2003 and as at January 31, 2008, estimates of all legal obligations at the Joint Venture level have been included in the consolidated financial statements of the Company. Processes to track and monitor these obligations are carried out at the Joint Venture level.

2008 ANNUAL REPORT

29

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

Income Tax

The Company accounts for income taxes under the asset and liability method. Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and the tax basis of assets and liabilities.

Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the period during which the change in tax rates is considered to be substantively enacted.

Intangible Assets and Goodwill

Certain of the Company’s intangible assets are recorded at fair value upon acquisition and have an indefinite useful life. The Company assesses impairment of such intangible assets by determining whether the carrying value exceeds the fair value. If the fair value is determined to be less than the net book value, the excess of the net book value over the fair value is charged to earnings in the year in which such impairment is determined by management.

The goodwill recorded on the Company’s books is reviewed at least annually for impairment; however, if there is indication of impairment in goodwill during the year, an assessment at the time will be completed.

Risks and Uncertainties

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

Nature of Mining

The operation of the Diavik Mine is subject to risks inherent in the mining industry, including variations in grade and other geological differences, unexpected problems associated with required water retention dikes, water quality, surface and underground conditions, processing problems, equipment performance, accidents, labour disputes, risks relating to the physical security of the diamonds, force majeure risks and natural disasters. Particularly with underground mining operations, inherent risks include variations in rock structure and strength as it impacts on mining method selection and performance, de-watering and water handling requirements, achieving the required paste backfill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.

The Diavik 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. The Company’s contribution to capital requirements to complete the underground development and supporting infrastructure contemplated by the new mine plan is estimated to be $221 million over the next two years, with funding expected to be provided in part from a CDN $75 million private placement completed on March 14, 2008, cash flow from operations and a refinancing of the Company’s existing credit facilities. There can be no assurance that the Company will be able to refinance its current credit facilities on satisfactory terms and conditions, or at all.

2008 ANNUAL REPORT

30

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

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

Mining and manufacturing are subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mining and manufacturing operations. To the extent that the Company’s operations are subject to uninsured environmental liabilities, the payment of such liabilities could have a material adverse effect on the Company.

Climate Change

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

2008 ANNUAL REPORT

31

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

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 liquidity and its 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.

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HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis

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 the new standards and the impact on the Company’s financial statements, please see note 3 to the consolidated financial statements on page 41 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.

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. This new standard will apply to the Company effective February 1, 2008.

The Company is currently assessing the impact of these new standards on its consolidated financial statements.

Outstanding Share Information

As at January 31, 2008
Authorized	Unlimited
Issued and outstanding shares	58,372,091
Options outstanding	1,719,338
Fully diluted	60,091,429

Additional Information

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

2008 ANNUAL REPORT

33

HARRY WINSTON DIAMOND CORPORATION

Management’s Responsibility for Financial Information

The consolidated financial statements and the information contained in the Annual Report have been prepared by the management of the Company. The financial statements have been prepared in accordance with accounting principles generally accepted in Canada.

The consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from the present assessment of this information because future events and circumstances may not occur as expected.

In meeting management’s responsibility for the reliability and timeliness of financial information, management maintains and relies on a comprehensive system of internal control and internal audit, including organizational and procedural controls, disclosure controls and procedures and internal control over financial reporting. The system of internal control includes written communication of policies and procedures governing corporate conduct and risk management; comprehensive business planning; effective segregation of duties; delegation of authority and personal accountability; escalation of relevant information for decisions regarding public disclosure; careful selection and training of personnel; and regular updating of accounting policies. These controls and audits are designed to provide reasonable assurance that the financial records are reliable for preparing financial statements and other financial information, assets are safeguarded against unauthorized use or disposition, liabilities are recognized, and Harry Winston Diamond Corporation is in compliance with all regulatory requirements.

The Company’s independent auditors, who are appointed by the shareholders, conduct an audit in accordance with generally accepted auditing standards to allow them to express an opinion on the financial statements.

The Board of Directors’ Audit Committee meets at least quarterly with management to review the internal controls, financial statements and related reporting matters, and with the independent auditors to review the scope and results of the annual audit prior to approval of the financial statements by the entire Board.

ROBERT A. GANNICOTT	ALAN S. MAYNE
CHIEF EXECUTIVE OFFICER	VICE PRESIDENT & CHIEF FINANCIAL OFFICER

2008 ANNUAL REPORT

34

HARRY WINSTON DIAMOND CORPORATION

Shareholders’ Auditors’ Report

Report on Financial Statements

To the Shareholders of Harry Winston Diamond Corporation (formerly Aber Diamond Corporation)

We have audited the consolidated balance sheets of Harry Winston Diamond Corporation (the "Company") as at January 31, 2008 and 2007 and the consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended January 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the years ended January 31, 2008 and 2007, we also conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at January 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the two-year period ended January 31, 2008 in accordance with Canadian generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 15, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
TORONTO, CANADA
April 15, 2008

2008 ANNUAL REPORT

35

HARRY WINSTON DIAMOND CORPORATION

Report onInternal Control over Financial Reporting

To the Shareholders and Board of Directors of Harry Winston Diamond Corporation
(formerly Aber Diamond Corporation)

We have audited Harry Winston Diamond Corporation’s (the "Company") internal control over financial reporting as of January 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management’s Discussion and Analysis". Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have conducted our audits on the consolidated financial statements in accordance with Canadian generally accepted auditing standards. With respect to the year ended January 31, 2008, we also have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated April 15, 2008 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
TORONTO, CANADA
April 15, 2008

2008 ANNUAL REPORT

36

HARRY WINSTON DIAMOND CORPORATION

Consolidated Balance Sheets

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

As at January 31,		2008		2007
Assets
Current assets:
Cash and cash equivalents (note 5)	$	49,628	$	54,174
Cash collateral and cash reserves    (note 5)		25,615		51,448
Accounts receivable		25,505		13,297
Inventory and supplies    (note 6)		322,228		273,736
Prepaid expenses and other current assets		58,617		27,683
		481,593		420,338
Deferred mineral property costs    (note 7)		179,990		188,058
Capital assets    (note 8)		548,827		384,532
Intangible assets, net    (note 10)		132,628		134,320
Goodwill    (note 4)		93,780		98,142
Other assets    (note 11)		16,167		18,187
Future income tax asset (note 13)		40,963		44,337
	$	1,493,948	$	1,287,914
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	124,426	$	118,971
Income taxes payable		48,118		5,776
Bank advances    (note 12(ii))		34,928		29,776
Current portion of long-term debt    (note 12)		54,137		95,434
		261,609		249,957
Long-term debt    (note 12)		255,212		185,446
Future income tax liability    (note 13)		370,500		333,498
Other long-term liability		1,730		–
Future site restoration costs    (note 14)		32,980		17,200
Minority interest		255		85
Shareholders’ equity:
Share capital    (note 15)		305,502		305,165
Contributed surplus		15,614		14,922
Retained earnings		225,334		165,625
Accumulated other comprehensive income		25,212		16,016
		571,662		501,728
Commitments and guarantees    (note 17) Subsequent events    (note 21)
	$	1,493,948	$	1,287,914

See accompanying notes to consolidated financial statements.

ON BEHALF OF THE BOARD:

Robert A. Gannicott	Matthew W. Barrett
DIRECTOR	DIRECTOR

2008 ANNUAL REPORT

37

HARRY WINSTON DIAMOND CORPORATION

Consolidated Statements of Earnings

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT PER SHARE AMOUNTS)

Years ended January 31,		2008		2007
Sales	$	679,307	$	558,793
Cost of sales		311,187		285,498
Gross margin		368,120		273,295
Selling, general and administrative expenses		150,445		126,536
Earnings from operations		217,675		146,759
Interest and financing expenses		(27,858)		(21,150)
Other income		2,758		5,081
Insurance settlement    (note 20)		13,488		–
Foreign exchange gain (loss)		(43,391)		8,784
Earnings before income taxes		162,672		139,474
Income taxes – Current    (note 13)		47,516		14,763
Income taxes – Future    (note 13)		8,578		20,067
Earnings before minority interest		106,578		104,644
Minority interest		170		375
Net earnings	$	106,408	$	104,269
Earnings per share
Basic	$	1.82	$	1.79
Fully diluted    (note 16)	$	1.81	$	1.76
Weighted average number of shares outstanding		58,369,338		58,257,449

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income

(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

Years ended January 31,		2008			2007
Net earnings	$	106,408	$	104,269
Other comprehensive income (loss)
Net gain (loss) on translation of net foreign operations (net of tax – nil)		9,196		(328)
Total comprehensive income	$	115,604	$	103,941

See accompanying notes to consolidated financial statements.

2008 ANNUAL REPORT

38

HARRY WINSTON DIAMOND CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

(expressed in thousands of United States dollars)

Years ended January 31,		2008		2007
COMMON SHARES:
Balance at beginning of year	$	305,165	$	300,652
Issued during the year		337		4,513
Balance at end of year		305,502		305,165
CONTRIBUTED SURPLUS:
Balance at beginning of year		14,922		15,267
Stock option expense		692		(345)
Balance at end of year		15,614		14,922
Retained earnings:
Balance at beginning of year		165,625		119,630
Net earnings		106,408		104,269
Dividends paid		(46,699)		(58,274)
Balance at end of year		225,334		165,625
Accumulated other comprehensive income:
Balance at beginning of year		16,016		16,344
Other comprehensive income (loss)       Net gain (loss) on translation of net foreign operations (net of tax – nil)		9,196		(328)
Balance at end of year		25,212		16,016
Total shareholders’ equity	$	571,662	$	501,728

See accompanying notes to consolidated financial statements.

2008 ANNUAL REPORT

39

HARRY WINSTON DIAMOND CORPORATION

Consolidated Statements of Cash Flows

(expressed in thousands of United States dollars)

For the years ended January 31,		2008		2007
Cash provided by (used in):
Operating
Net earnings	$	106,408	$	104,269
Items not involving cash:
Amortization and accretion		81,174		68,728
Future income taxes		8,578		20,067
Stock-based compensation		2,422		1,250
Foreign exchange		45,201		(7,617)
Loss on write-off of investment		–		909
Minority interest		170		352
Change in non-cash operating working capital		(50,069)		(10,393)
		193,884		177,565
Financing
Increase/(decrease) in long-term debt		(19,637)		51,062
Increase in revolving credit		52,722		64,716
Dividends paid		(46,699)		(58,274)
Issue of common shares		337		2,918
		(13,277)		60,422
Investing
Cash collateral and cash reserve		25,701		(37,172)
Deferred mineral property costs		(7,522)		(16,834)
Capital assets		(201,845)		(119,904)
Deferred charges		(2,115)		(171)
Purchase of Harry Winston Inc.		–		(158,150)
		(185,781)		(332,231)
Foreign exchange effect on cash balances		628		302
Decrease in cash and cash equivalents		(4,546)		(93,942)
Cash and cash equivalents, beginning of year    (note 5)		54,174		148,116
Cash and cash equivalents, end of year   (note 5)	$	49,628	$	54,174
Change in non-cash operating working capital
Accounts receivable		(8,641)		1,058
Prepaid expenses and other current assets		(32,756)		6,157
Inventory and supplies		(48,489)		(53,807)
Accounts payable and accrued liabilities		9,622		34,117
Income taxes payable		30,195		2,082
	$	(50,069)	$	(10,393)
Supplemental cash flow information
Cash taxes paid	$	11,052	$	11,780
Cash interest paid	$	24,946	$	18,746

See accompanying notes to consolidated financial statements.

2008 ANNUAL REPORT

40

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

Years ended January 31, 2008 and 2007
(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% 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 name of Aber Diamond Mines Ltd. was changed to Harry Winston Diamond Mines Ltd. on December 3, 2007. 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 consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in Canada. The principal accounting policies presently followed by the Company are summarized as follows:

(a)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries as well as its proportionate share of unincorporated joint arrangements.

Subsidiaries

A subsidiary is an entity that is controlled by the Company. The consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Company and its subsidiaries after eliminating intercompany balances and transactions. For partly owned subsidiaries, the net assets and net earnings attributable to minority shareholders are presented as minority interests on the consolidated balance sheet and consolidated statement of earnings.

Joint Arrangements that Are Not Entities (“Joint Arrangements”)

The Diavik Joint Venture is an unincorporated joint arrangement. Harry Winston Diamond Corporation owns an undivided 40% interest in the assets, liabilities and expenses of the Joint Venture. Harry Winston Diamond Corporation records its proportionate interest in the assets, liabilities and expenses of the Joint Venture in the Company’s consolidated financial statements with a one-month lag. The accounting policies described below include those of the Joint Venture.

2008 ANNUAL REPORT

41

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(b)

Measurement Uncertainty

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of earnings, revenues and expenses during the reporting year. Significant areas requiring the use of management estimates relate to the determination of impairment of capital assets, intangible assets, goodwill and deferred mineral property costs, estimation of future site restoration costs and future income taxes. Financial results as determined by actual events could differ from those estimated.

(c)

Revenue Recognition

Revenue from rough diamond sales is recognized upon delivery of merchandise when the customer takes ownership and assumes risk of loss, persuasive evidence of an arrangement exists, the Company’s price to the customer is fixed or determinable and collection of the resulting receivable is reasonably assured.

Revenue from fine jewelry and watch sales is recognized upon delivery of merchandise when the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Sales are reported net of returns.

(d)

Cash Resources

Cash and cash equivalents, and cash collateral and cash reserves, consist of cash on hand, balances with banks and short-term money market instruments (with a maturity on acquisition of less than 90 days), and are carried at cost, which approximates market.

Funds in cash collateral and cash reserves are maintained as prescribed under the Company’s debt financing arrangements and will become available to Harry Winston Diamond Corporation for general corporate purposes and for debt servicing as prescribed by the terms of credit facility agreements.

(e)

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

(f)

Inventory

Rough diamond inventory is recorded at the lower of cost or net realizable value and includes diamonds in process and diamonds held for sale. Cost is determined on an average cost basis including production costs and value-added processing activity.

Merchandise inventory is recorded at the lower of cost or net realizable value and includes fine jewelry and watches. Included in merchandise inventory are production costs such as material, labour and overhead costs.

Supplies inventory is recorded at the lower of average cost or replacement value and includes consumables and spare parts maintained at the Diavik Mine site and at the Company’s sorting and distribution facility locations.

(g)

Deferred Mineral Property Costs

All direct costs relating to mineral properties, including mineral claim acquisition costs, exploration and development expenditures in the pre-production stage, ongoing property exploration expenditures, pre-production operating costs net of any recoveries, interest, and amortization, are capitalized and accumulated on a property-by-property basis.

The costs of deferred mineral properties from which there is production are amortized using the units-of-production method based upon estimated proven and probable reserves.

General exploration expenditures which do not relate to specific resource properties are expensed in the period incurred.

On an ongoing basis, the Company evaluates each property based on results to date to determine the nature of exploration and development activities that are warranted in the future. If there is little prospect of the Joint Venture continuing to explore or develop a property, the deferred costs related to that property are written down to the estimated fair value.

2008 ANNUAL REPORT

42

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(h)

Capital Assets

Capital assets are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the units-of-production method or straight-line method as appropriate. The units-of-production method is applied to a substantial portion of Diavik Mine capital assets and, depending on the asset, is based on carats of diamonds recovered during the period relative to the proven and probable ore reserves of the ore deposit being mined or to the total ore deposit. Other capital assets are depreciated using the straight-line method over the estimated useful lives of the related assets, which are as follows:

Asset	Estimated useful life (years)
Buildings	10–40
Machinery and mobile equipment	3–10
Computer equipment and software	3
Furniture and equipment	2–10
Leasehold and building improvements	Up to 20

Amortization for mine related assets was charged to deferred mineral property costs during the pre-commercial production stage.

Maintenance and repair costs are charged to earnings while expenditures for major renewals and improvements are capitalized.

The recoverability of the amounts shown for the Diavik Mine capital assets is dependent upon the continued existence of economically recoverable reserves, upon maintaining title and beneficial interest in the property, and upon future profitable production or proceeds from disposition of the diamond properties. The amounts representing Diavik Mine capital assets do not necessarily represent present or future values.

Upon the disposition of capital assets, the accumulated amortization is deducted from the original cost and any gain or loss is reflected in current earnings.

(i)

Intangible Assets

Intangible assets acquired individually or as part of a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets acquired in a transaction, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets acquired based on their fair values at acquisition.

Intangible assets with finite useful lives are amortized on a straight-line basis over their useful lives as follows:

Asset	Estimated useful life (years)
Wholesale distribution network	10
Store leases	Up to 9

The amortization methods and estimated useful lives of intangible assets are reviewed annually.

Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized in income for the excess, if any.

(j)

Goodwill

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated, as of the date of the business combination, to the Company’s reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary.

The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of the goodwill is determined in a business combination, using the fair value of the reporting unit as if it were the purchase price. When the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the consolidated statement of earnings before extraordinary items and discontinued operations.

2008 ANNUAL REPORT

43

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(k)

Other Assets

Other assets are amortized over a period not exceeding ten years.

(l)

Future Site Restoration Costs

The Company records the fair value of any asset retirement obligation as a long-term liability in the year in which the related environmental disturbance occurs, based on the net present value of the estimated future costs. The fair value of the liability is added to the carrying amount of the deferred mineral property and this additional carrying amount is amortized over the life of the asset based on units of production. The obligation is adjusted periodically to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.

(m)

Foreign Currency Translation

The functional currency of the Company is the US dollar. At year end, monetary assets and liabilities denominated in foreign currencies are translated to US dollars at exchange rates in effect at the balance sheet date and non-monetary assets and liabilities are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in earnings.

For certain subsidiaries of the Company where the functional currency is not the US dollar, the assets and liabilities of these subsidiaries are translated at the rate of exchange in effect at the balance sheet date. Revenues and expenses are translated at the rate of exchange in effect at the time of the transactions. Foreign exchange gains and losses are accumulated in other comprehensive income under shareholders’ equity.

(n)

Income and Mining Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, future tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying value and the tax basis of assets and liabilities.

Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A reduction in respect of the benefit of a future tax asset (a valuation allowance) is recorded against any future tax asset if it is not likely to be realized. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the year during which the change in tax rates is considered to be substantively enacted.

(o)

Stock-Based Compensation

The Company applies the fair value method to all grants of stock options.

The fair value of options granted is estimated at the date of grant using a Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, volatility factor of the expected market price of the Company’s stock, and a weighted average expected life of the options. The estimated fair value of the options is recorded as an expense on a straight-line basis over the vesting period, with an offsetting credit to shareholders’ equity. Any consideration received on amounts attributable to stock options is credited to share capital.

(p)

Restricted and Deferred Share Unit (“RSU” and “DSU”) Plans

The RSU and DSU Plans are full value phantom shares that mirror the value of Harry Winston Diamond Corporation’s publicly traded common shares. Grants under the RSU Plan are on a discretionary basis to employees of the Company subject to Board of Director approval. Each RSU grant vests on the third anniversary of the grant date, subject to special rules for death and disability. Grants under the DSU Plan are awarded to non-executive directors of the Company. Each DSU grant vests immediately on the grant date.

(q)

Post Retirement Benefits

The expected costs of post retirement benefits under defined benefit arrangements are charged to the profit and loss account over the service lives of employees entitled to those benefits. Variations from the regular cost are spread on a straight-line basis over the expected average remaining service lives of relevant current employees. The plan assets and liabilities are valued annually by qualified actuaries.

(r)

Financial Instruments

From time to time, the Company may use a limited number of derivative financial instruments to manage its foreign currency and interest rate exposure. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedge instrument and the item being hedged, both at inception and throughout the hedged period. Gains and losses resulting from any ineffectiveness in a hedging relationship must be recognized immediately in net income. The Company does not use derivatives for trading or speculative purposes.

2008 ANNUAL REPORT

44

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(s)

Basic and Diluted Earnings per Share

Basic earnings per share are computed by dividing net earnings (loss) by the weighted average number of shares outstanding during the year.

Diluted earnings per share are prepared using the treasury stock method to compute the dilutive effect of options and warrants. The treasury stock method assumes the exercise of any “in-the-money” options with the option proceeds would be used to purchase common shares at the average market value for the year. Options with an average market value for the year higher than the exercise price are not included in the calculation of diluted earnings per share as such options are not dilutive.

(t)

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

(u)

Comparative Figures

Certain figures have been reclassified to conform with presentation in the current year.

(v)

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: (i) Financial Instruments – Recognition and Measurement, (ii) Hedges, and (iii) Comprehensive Income.

Financial Instruments

This new standard required 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 elected to add transaction costs related to its non-revolving long-term debt to the carrying amount of the debt and was required to reclassify cumulative translation amounts to accumulated other comprehensive income, which 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 required 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 reserves	Held for trading	Fair value
Accounts receivable	Loans and receivables	Amortized cost
Accounts payable and accrued liabilities	Held for trading	Fair value
Income taxes payable	Held for trading	Fair value
Bank advances	Held for trading	Fair value
Long-term debt	Other liabilities	Amortized cost

2008 ANNUAL REPORT

45

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

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 required 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.

(w)

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:
Acquisition

On September 29, 2006, the Company acquired the remaining 47.17% ownership of Harry Winston Inc. for $157.2 million, paid in cash on the acquisition date.

The final allocation of the purchase price to the fair values of assets acquired and liabilities assumed is set forth in the table below. The valuation of intangible assets has been completed by a third party valuator. Purchase price amounts give rise to future income tax liabilities that have been recorded in the same year in which the intangible assets are separately identified.

Cash	$	2,433
Accounts receivable		4,909
Inventory		107,690
Intangibles		92,414
Goodwill (a)		57,230
Other assets		31,835
Accounts payable and accrued liabilities		(18,728)
Bank loan		(54,653)
Other liabilities		(64,980)
	$	158,150
Cash paid at acquisition	$	157,150
Acquisition and other costs		1,000
	$	158,150

(a)

Tax benefits relating to pre-acquisition net operating losses (“NOLs”) at Harry Winston Inc. were not recognized as a separate identifiable asset in the purchase price allocations and consequently are a component of goodwill. Harry Winston Inc. has since recognized benefits of $5.2 million relating to these NOLs (2008 – $4.4 million; 2007 – $0.8 million), which have been recorded as a reduction to goodwill in the applicable periods.

2008 ANNUAL REPORT

46

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

NOTE 5:
Cash Resources

		2008		2007
Cash on hand and balances with banks	$	33,028	$	44,377
Short-term investments (a)		16,600		9,797
Total cash and cash equivalents		49,628		54,174
Cash collateral and cash reserves		25,615		51,448
Total cash resources	$	75,243	$	105,622

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

NOTE 6:
Inventory and Supplies

		2008		2007
Rough diamond inventory	$	17,097	$	17,648
Merchandise inventory		254,101		228,157
Supplies inventory		51,030		27,931
Total inventory and supplies	$	322,228	$	273,736

NOTE 7:
Deferred Mineral Property Costs

						2008						2007
			Accumulated			Net			Accumulated			Net
		Cost	amortization		book value			Cost	amortization		book value
Diavik Mine	$	271,316	$	91,326	$	179,990	$	265,217	$	77,159	$	188,058

The Company holds a 40% ownership interest in the Diavik group of mineral claims, which contains commercially mineable diamond reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of the Joint Venture and holds the remaining 60% interest. The claims are subject to private royalties which are in the aggregate 2% of the value of production.

NOTE 8:
Capital Assets

						2008						2007
			Accumulated			Net			Accumulated			Net
		Cost	amortization		book value			Cost	amortization		book value
Diavik equipment and leaseholds (a)	$	586,208	$	136,771	$	449,437	$	422,419	$	101,912	$	320,507
Furniture, equipment and other (b)		29,163		13,044		16,119		20,193		9,530		10,663
Real property – land and building (c)		97,745		14,474		83,271		64,691		11,329		53,362
	$	713,116	$	164,289	$	548,827	$	507,303	$	122,771	$	384,532

(a)

Diavik equipment and leaseholds are project related assets at the Joint Venture level.

(b)

Furniture, equipment and other includes equipment located at the Company’s diamond sorting facility and at Harry Winston Inc. salons.

(c)

Real property is comprised of land and a building that houses the corporate activities of the Company and various leasehold improvements to Harry Winston Inc. salons and corporate offices.

2008 ANNUAL REPORT

47

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

NOTE 9:
Diavik Joint Venture

The following represents Harry Winston Diamond Corporation’s 40% proportionate interest in the Joint Venture as at December 31, 2007 and 2006:

		2008		2007
Current assets	$	110,199	$	66,037
Long-term assets		605,300		477,753
Current liabilities		40,631		35,671
Long-term liabilities and participant’s account		674,868		508,119
Year ended:
Expenses net of interest income of $0.5 million (2007 – $0.8 million) (a)		177,049		171,429
Cash flows resulting from operating activities		(121,440)		(76,828)
Cash flows resulting from financing activities		290,615		180,252
Cash flows resulting from investing activities		(165,645)		(100,467)

(a) The Joint Venture only earns interest income.

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 10:
Intangible Assets

				Accumulated
	Amortization period		Cost	amortization			2008 net		2007 net
Trademark	indefinite life	$	112,995	$	–	$	112,995	$	112,995
Drawings	indefinite life		12,365		–		12,365		12,365
Wholesale distribution network	120 months		5,575		(1,369)		4,206		4,763
Store leases	65 to 105 months		5,639		(2,577)		3,062		4,197
Intangible assets		$	136,574	$	(3,946)	$	132,628	$	134,320

Amortization expense for 2008 was $1.7 million (2007 – $1.0 million).

NOTE 11:
Other Assets

		2008		2007
Prepaid pricing discount (a),
net of accumulated amortization
of $4.6 million (2007 – $3.1 million)	$	7,440	$	8,880
Other assets		2,512		5,220
Refundable security deposits		6,215		4,087
	$	16,167	$	18,187

(a)

Prepaid pricing discount represents funds paid to Tiffany & Co. (“Tiffany”) by the Company to amend its rough diamond supply agreement. The amendment eliminated all pricing discounts on future sales. The payment has been deferred and is being amortized on a straight-line basis over the remaining life of the contract.

NOTE 12:
Long-Term Debt and Bank Advances

(i)

Long-Term Debt

		2008		2007
Credit facility (a)	$	125,677	$	158,140
Harry Winston Inc. credit facilities (b)		174,850		114,782
First mortgage on real property		8,822		7,958
Total long-term debt		309,349		280,880
Less current portion		(54,137)		(95,434)
	$	255,212	$	185,446

2008 ANNUAL REPORT

48

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(a)

Credit Facility

The Company’s credit agreement includes two senior secured term facilities and a senior secured revolving facility. The facilities have underlying interest rates, which at the option of the Company are either LIBOR plus a spread of 1.25% to 2.375%, or US Base Rate plus a spread of 0.25% to 1.375%. On May 31, 2007, Harry Winston Diamond Corporation amended its existing credit facility to extend the maturity date to December 15, 2009 from December 15, 2008. The senior secured revolving facility has a standby fee on undrawn amounts up to 1.5%, dependent on certain financial ratios, payable quarterly. The Company is required to comply with certain financial and non-financial covenants. These covenants include consolidated tangible net worth at the Harry Winston Diamond Corporation level, and debt to free cash flow, current assets to current liabilities, mine life protection ratio, historical debt service coverage ratio and annual loan life coverage ratio at the Harry Winston Diamond Mines Ltd. level. Under the facilities, the Company is required to establish a debt reserve account of $25.0 million and an amount equal to the billing delivered by DDMI reflecting estimated operating expenses, maintenance capital expenditures and other capital expenditures of the Diavik Mine for 30 days following each reporting period. The effective interest rate at January 31, 2008 was 4.53%.

Scheduled amortization of the Company’s senior secured term facilities is $12.5 million payable quarterly commencing March 2008 with the remaining balance due in December 2009. The maximum amount permitted to be drawn under the senior secured revolving facility is reduced by $12.5 million quarterly, commencing March 2009. As at January 31, 2008, the Company had $76.4 million of senior secured term facilities and had $50.0 million drawn under its senior secured revolving facility. Interest and financing charges include interest incurred on long-term debt, as well as amortization of deferred financing charges.

(b)

Harry Winston Inc. Credit Facilities

(I)

Harry Winston Inc. and Harry Winston Japan, K.K. amended its $140.0 million secured credit agreement on April 23, 2007 with a syndicated group of banks to increase it to $200.0 million effective April 30, 2007. The credit agreement includes both a revolving line of credit and fixed rate loans. At January 31, 2008, $154.0 million had been drawn against the facility. The amount available under this facility is subject to availability determined using a borrowing formula based on certain assets owned by Harry Winston Inc. and Harry Winston Japan, K.K. The amendment further extends the additional facility of $10.0 million scheduled to expire on April 30, 2007 to March 31, 2008. The amended credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The Harry Winston Inc. and Harry Winston Japan, K.K. credit facility, which expired on March 31, 2008, has no scheduled repayments required before that date.

The credit agreement contains affirmative and negative financial and non-financial covenants, which apply to the retail segment. These provisions include minimum net worth, minimum coverage of fixed charges, leverage ratio, minimum EBITDA and limitations on capital expenditures and certain investments. The outstanding borrowings under the credit facility are secured by inventory and accounts receivable of Harry Winston Inc. and inventory of Harry Winston Japan, K.K. The common stock of Harry Winston Inc. and 65% of the common stock of Harry Winston Inc.’s foreign subsidiaries are also pledged to the bank to secure the loan.

The facility provides for fixed rate loans and floating rate loans, which bear interest at 2.25% above LIBOR and 1.00% above the bank’s prime rate, respectively. The effective interest rate at January 31, 2008 was 9.0% for the revolving line of credit loans and 7.46% for the fixed rate loans.

On February 22, 2008 Harry Winston Inc. refinanced its secured credit agreement by entering into a new secured five-year agreement with a consortium of banks, establishing a $250.0 million facility for revolving credit loans. The new facility expires on March 31, 2013. In addition, Harry Winston Inc. may increase the credit facility by an additional $50.0 million to $300.0 million during the term of the facility. There are no scheduled repayments required before maturity. The new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of Harry Winston Inc.

The new credit agreement contains affirmative and negative non-financial and financial covenants, which apply to the retail segment. These provisions include consolidated minimum tangible net worth, minimum coverage of fixed charges, leverage ratio and limitations on capital expenditures and certain investments. The credit agreement also includes a change of control provision, which would result in the entire unpaid principal and all accrued interest of the facility becoming due immediately upon change of control, as defined. Any material adverse change, as defined, in the retail segment’s business, assets, liabilities, consolidated financial position or consolidated results of operations constitutes default under the agreement.

The retail segment has pledged 100% of Harry Winston Inc.’s common stock and 66 2/3% of the common stock of its foreign subsidiaries to the bank to secure the loan. Inventory and accounts receivable of Harry Winston Inc. are pledged as collateral to secure the borrowings of Harry Winston Inc. In addition, an assignment of proceeds on insurance covering security collateral was made.

2008 ANNUAL REPORT

49

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

Loans under the credit facility can be either fixed rate loans or revolving line of credit loans. The fixed rate loans will bear interest within a range of 1.50% to 2.25% above LIBOR based upon a pricing grid determined by the fixed charge coverage ratio. Interest under this option will be determined for periods of either one, two, three or six months. The revolving line of credit loans will bear interest within a range of 0.50% to 0.75% above the bank’s prime rate based upon a pricing grid determined by the fixed charge coverage ratio as well.

(II)

Harry Winston S.A. has entered into a 25-year loan agreement to finance the construction of a new watch factory in Geneva, Switzerland for 17.5 million CHF. The watch factory has been pledged to secure the loan. The loan agreement bears interest at 3.55% and matures on January 31, 2033. Under this agreement approximately $16.1 million is outstanding at January 31, 2008. Quarterly payments on the loan are scheduled to begin on June 30, 2008.

(III)

On October 31, 2007, Harry Winston Japan, K.K. entered into a secured credit facility for $5.4 million (¥575 million). This credit agreement is secured solely by the inventory of Harry Winston Japan, K.K. This credit facility expires on June 20, 2008, and bears interest at 1.91%. Under this agreement, $5.4 million was outstanding at January 31, 2008, of which $0.7 million was classified as bank advances.

(c)

Required Principal Repayments

2009	$	54,137
2010		77,500
2011		5,857
2012		1,236
2013		1,292
Thereafter		169,327
	$	309,349

(ii)

Bank Advances

The Company operates two other revolving financing facilities. The Company has available $45.0 million (utilization in either US dollars or Euros) and $10.0 million for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V. and its Israeli subsidiary, Harry Winston Diamond (Israel) Limited, respectively. Borrowings under the Belgium facility bear interest at the bank’s base rate plus 1.5% and borrowings under the Israeli facility bear interest at LIBOR plus 1%. At January 31, 2008, $19.9 million was drawn under these two facilities. The Belgium facility has an annual commitment fee of 0.75% per annum. Both facilities are guaranteed by Harry Winston Diamond Corporation.

Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks each amounting to $7.0 million (¥750 million). The credit facilities bear interest at 2.13% and 2.38% per annum and expire on June 2, 2008 and June 28, 2010, respectively. Under these agreements, bank advances of $14.0 million were outstanding at January 31, 2008.

NOTE 13:
Income Tax

The future income tax asset of the Company is $41.0 million, of which $18.1 million relates to Harry Winston Inc. Included in the future tax asset is $13.2 million that has been recorded to recognize the benefit of $40.2 million of net operating losses that Harry Winston Inc. has available for carry forward to shelter income taxes for future years. The net operating losses are scheduled to expire between 2021 and 2027.

The future income tax liability of the Company is $370.5 million of which $73.0 million relates to Harry Winston Inc. Harry Winston Inc.’s future income tax liabilities include $57.1 million from the purchase price allocation. The Company’s future income tax asset and liability accounts are revalued to take into consideration the change in the Canadian dollar compared to the US dollar and the unrealized foreign exchange gain or loss is recorded in net earnings for each year.

(a)

The income tax provision consists of the following:

		2008		2007
Current expense	$	47,516	$	14,763
Future expense		8,578		20,067
	$	56,094	$	34,830

2008 ANNUAL REPORT

50

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(b)

The tax effects of temporary differences that give rise to significant portions of the future tax assets and liabilities at January 31, 2008 and 2007 are as follows:

		2008		2007
Future income tax assets:
Net operating loss carryforwards	$	23,458	$	36,589
Capital assets		1,158		770
Future site restoration costs		13,135		6,948
Other future income tax assets		6,409		5,125
Gross future income tax assets		44,160		49,432
Valuation allowance		(3,197)		(5,095)
Future income tax assets		40,963		44,337
Future income tax liabilities:
Deferred mineral property costs		(56,776)		(78,634)
Capital assets		(160,319)		(102,261)
Retail inventory		(13,781)		(19,530)
Goodwill		(57,718)		(61,460)
Unrealized foreign exchange gains		(3,194)		(871)
Other future income tax liabilities		(78,712)		(70,742)
Future income tax liabilities		(370,500)		(333,498)
Future income tax liability, net	$	(329,537)	$	(289,161)

(c)

The difference between the amount of the reported consolidated income tax provision and the amount computed by multiplying the earnings before income taxes by the statutory tax rate of 34% (2007 – 37%) is a result of the following:

		2008		2007
Expected income tax expense	$	55,308	$	51,605
Non-deductible (non-taxable) items		9,773		(6,032)
Northwest Territories mining royalty (net of income tax relief)		18,856		12,631
Impact of changes in future corporate income tax rates		(11,697)		(16,949)
Earnings subject to tax different than statutory rate		(5,293)		(7,965)
Benefit on losses recognized through reduction of goodwill		4,362		840
Assessments and adjustments		(11,649)		–
Change in valuation allowance		(2,477)		363
Other		(1,089)		337
Recorded income tax expense	$	56,094	$	34,830

(d)

The Company has net operating loss carryforwards for Canadian income tax purposes of approximately $23.9 million. Harry Winston Inc. has net operating loss carryforwards for US income tax purposes of $32.2 million and $8.0 million for other foreign jurisdiction tax purposes.

NOTE 14:
Future Site Restoration Costs

		2008		2007
At February 1, 2007 and 2006	$	17,200	$	15,316
Revision of previous estimates		14,897		–
Accretion of provision		883		1,884
At January 31, 2008 and 2007	$	32,980	$	17,200

The Joint Venture has an obligation under various agreements (note 17) to reclaim and restore the lands disturbed by its mining operations.

The Company’s share of the total undiscounted amount of the future cash flows that will be required to settle the obligation incurred at January 31,2008 is estimated to be $53.4 million of which approximately $33.1 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2008 reflects anticipated higher costs for fuel, labour and equipment based on a significant escalation in these key operating costs in recent years. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at a credit adjusted risk-free interest rate of 5.57%.

2008 ANNUAL REPORT

51

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

NOTE 15:
Share Capital

(a)

Authorized

Unlimited common shares without par value.

(b)

Issued

	Number of shares		Amount
Balance, January 31, 2006	58,133,780	$	300,652
Shares issued for:
Exercise of options	226,975		4,513
Balance, January 31, 2007	58,360,755	$	305,165
Shares issued for:
Exercise of options	11,336		337
Balance, January 31, 2008	58,372,091	$	305,502

(c)

Stock Options

Under the Employee Stock Option Plan, approved in February 2001, the Company may grant options for up to 4,500,000 shares of common stock. Options may be granted to any director, officer, employee or consultant of the Company or any of its affiliates. Options granted to directors vest immediately and options granted to officers, employees or consultants vest over three to four years. The maximum term of an option is ten years. The number of shares reserved for issuance to any one optionee pursuant to options cannot exceed 2% of the issued and outstanding common shares of the Company at the date of grant of such options.

The exercise price of each option cannot be less than the fair market value of the shares on the last trading day preceding the date of the grant.

The Company’s shares are primarily traded on a Canadian dollar based exchange, and accordingly stock option information is presented in Canadian dollars, with conversion to US dollars at the average exchange rate for the year.

Compensation expense for stock options was $0.2 million for fiscal 2008 (2007 – $2.9 million) and is presented as a component of both cost of sales and selling, general and administrative expenses. The amount credited to share capital for the exercise of the options is the sum of (a) the cash proceeds received and (b) the amount debited to contributed surplus upon exercise of stock options by optionees (2008 – $0.1 million; 2007 – $1.6 million).

Changes in share options outstanding are as follows:

						2008						2007
				Weighted average						Weighted average
	Options			exercise price			Options				exercise price
		000s		CDN$		US$		000s		CDN$		US$
Outstanding, beginning of year		1,631	$	23.43	$	20.63		1,959	$	23.34	$	20.49
Granted		100		25.52		24.08		–		–		–
Exercised		(11)		27.01		25.48		(227)		14.65		12.90
Expired		(1)		26.45		24.95		(101)		41.39		36.49
		1,719	$	23.52	$	22.19		1,631	$	23.43	$	20.63

The following summarizes information about stock options outstanding at January 31, 2008:

		Options outstanding				Options exercisable
		Weighted average
Range of exercise	Number	remaining	Weighted average		Number	Weighted average
prices	outstanding	contractual life		exercise price	exercisable		exercise price
CDN$	000s	in years		CDN$	000s		CDN$
$9.10–$9.15	268	1.8	$	9.15	268	$	9.15
10.60–12.45	302	2.9		12.36	302		12.36
17.50–17.50	39	3.8		17.50	39		17.50
23.35–29.25	765	5.3		25.36	665		25.34
36.38–40.00	110	5.9		39.67	105		39.83
41.45–41.95	235	6.4		41.66	177		41.66
	1,719		$	23.52	1,556	$	22.67

2008 ANNUAL REPORT

52

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(d)

Stock-Based Compensation

The Company applies the fair value method to all grants of stock options.

The fair value of options granted during the years ended January 31, 2008 and 2007 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions. The Company did not grant any options during fiscal 2007.

	2008		2007
Risk-free interest rate	3.45%		–
Dividend yield	0.00%		–
Volatility factor	39.18%		–
Expected life of the options	3.6 years		–
Average fair value per option, CDN	$ 8.53	$	–
Average fair value per option, US	$ 8.50	$	–

(e)

RSU and DSU Plans

RSU	Number of units
Balance, January 31, 2006	103,959
Awards during the year (net):
RSU	70,431
Balance, January 31, 2007	174,390
Awards and payouts during the year (net):
RSU awards	21,873
RSU payouts	(52,548)
Balance, January 31, 2008	143,715
DSU	Number of units
Balance, January 31, 2006	41,079
Awards during the year (net):
DSU	18,070
Balance, January 31, 2007	59,149
Awards and payouts during the year (net):
DSU awards	21,626
DSU payouts	(8,577)
Balance, January 31, 2008	72,198

During the fiscal year, the Company granted 21,873 RSUs (net of forfeitures) and 21,626 DSUs under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of Harry Winston Diamond Corporation’s publicly traded common shares.

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

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

The expenses related to the RSUs and DSUs are accrued based on the price of Harry Winston Diamond Corporation’s common shares at the end of the period and on the probability of vesting. This expense is recognized on a straight-line basis over the term of the grant. The Company recognized a recovery of $0.1 million (2007 – expense of $3.1 million) for the twelve months ended January 31, 2008.

NOTE 16:
Earnings per Share

The following table sets forth the computation of diluted earnings per share:

		2008		2007
Numerator:
Net earnings for the year	$	106,408	$	104,269
Denominator (thousands of shares):
Weighted average number of shares outstanding		58,369		58,257
Dilutive effect of employee stock options		530		1,022
		58,899		59,279
Number of anti-dilutive options		–		–

2008 ANNUAL REPORT

53

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

NOTE 17:
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 2008. 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 January 31, 2008 was $61.5 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:

2009	$	93,573
2010		95,340
2011		94,255
2012		91,106
2013		91,044
Thereafter		155,976

NOTE 18:
Employee Benefit Plans

		Year ended		Year ended
		January 31,		January 31,
Expense for the year		2008		2007
Defined benefit pension plan - Harry Winston retail segment (a)	$	1,213	$	61
Defined contribution plan - Harry Winston retail segment (b)		1,063		389
Defined contribution plan - Diavik Mine (b)		833		701
	$	3,109	$	1,151

(a)

Defined Benefit Pension Plan

The Harry Winston retail segment sponsors three separate defined benefit pension plans covering substantially all of its employees in the United States, Japan and Switzerland. The principal pension plan is the Harry Winston Employee Retirement Plan for Harry Winston Inc. US employees. The benefits for the Harry Winston Inc. plan are based on years of service and the employee’s compensation. In April 2001, Harry Winston Inc. amended its defined benefit pension plan. The amendment froze plan participation effective April 30, 2001. Harry Winston Inc.’s funding policy for the US plan is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Plan assets consisted primarily of fixed income, equity and other short-term investments. The other two defined benefit pension plans are sponsored by retail segment subsidiaries Harry Winston Japan, K.K. and Harry Winston S.A., which converted their previous pension plan arrangements into defined benefit plans effective February 1, 2007. Pension liabilities for these two non-US plans are funded in accordance with local laws and regulations.

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54

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(I)

Information about Harry Winston Inc.’s US defined benefit plan is as follows:

		2008		2007
Accrued benefit obligation:
Balance, beginning of year	$	11,784	$	11,835
Interest cost		627		623
Actuarial loss		(373)		410
Effects of changes in assumptions		–		(278)
Benefits paid		(742)		(806)
Balance, end of year		11,296		11,784
Plan assets:
Fair value, beginning of year		10,574		9,594
Actual return on plan assets		397		1,203
Employer contributions		155		583
Benefits paid		(742)		(806)
Fair value, end of year		10,384		10,574
Funded status – plan deficit (included in accrued liabilities)	$	(912)	$	(1,210)

US plan assets represented approximately 63% of total Harry Winston retail segment plan assets at January 31, 2008. The unfunded status of the retail segment plans are comprised of $0.9 million attributed to the US-based Harry Winston Inc. plan, as reported in the table above, and $0.8 million attributed to the Harry Winston Japan, K.K. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $0.8 million. The Harry Winston S.A. plan was fully funded at January 31, 2008 with a benefit obligation of $6.0 million offset by plan assets of the same amount.

The following table provides the components of the net periodic pension costs for the three plans for the years ended January 31.

		2008		2007
Service cost	$	(1,357)	$	–
Interest cost		(808)		(623)
Expected return on plan assets		952		705
Net actuarial loss		–		(103)
Total		(1,213)		(21)

(ii)

Plan assets

The asset allocation of Harry Winston Inc.’s US pension benefits at January 31, 2008 were as follows:

	2008	2007
Asset category:
Cash equivalents	2%	3%
Equity securities	72%	72%
Fixed income securities	24%	22%
Other	2%	3%
Total	100%	100%

(iii)

The significant assumptions used for Harry Winston Inc.’s US plan is as follows:

	2008	2007
Accrued benefit obligation:
Discount rate	6.24%	5.75%
Expected long-term rate of return	7.50%	7.50%
Benefit costs for the year:
Discount rate	5.75%	5.50%
Expected long-term rate of return on plan assets	7.50%	7.50%
Rate of compensation increase	0.00%	0.00%

Harry Winston Inc’s overall expected long-term rate of return on assets is 7.50%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments. Harry Winston S.A’s overall expected long-term rate of return on assets is 3.25%. Long-term rate of return for Harry Winston Japan, K.K. plan assets is not applicable due to the unfunded status of the plan.

The weighted average assumptions used to determine the benefit obligations for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2008 are a discount rate and expected long-term rate of return of 2.00% and 0.00% and 3.00% and 3.25%, respectively.

The weighted average assumptions used to determine the benefit costs for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2008 are a discount rate, expected long-term rate of return and a rate of compensation increase of 2.00%, 0.00% and 4.60%, and 3.00%, 3.25% and 1.00%, respectively.

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55

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

(iv)

Harry Winston retail segment expects to contribute $0.9 million to its pension plan in calendar 2008

Benefits of $1.3 million are expected to be paid by the retail segment in each calendar year from 2009 to 2012. The aggregate benefits expected to be paid in the five calendar years from 2013 to 2017 are $6.4 million. The expected benefits are based on the same assumptions used to measure the retail segment’s benefit obligation at January 31, 2008.

(b)

Defined Contribution Plan

Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. In the previous year, the Company provided employer-matching contributions based on amounts contributed by an employee, up to 50% of the first 6% of the employee’s salary. For the fiscal year ended January 31, 2008, the Company elected to increase the employer-matching contribution to 100% of the first 6% of the employee’s salary. Employees must meet minimum service requirements and be employed on December 31 of each year in order to receive this matching contribution.

The Joint Venture sponsors a defined contribution plan whereby the employer contributes 6% of the employee’s salary.

(c)

Deferred Compensation Plan

On January 28, 2005, the Board of Directors of Harry Winston Inc. approved an Equity Participation Plan (the “Plan”) for certain executives of Harry Winston Inc. The Plan involves “Phantom Stock” awards, as defined in the executives’ employment agreements, which are payable in cash. These awards are split into a 40% time-vested award and a 60% cliff-vested award. The value of the award for each executive is calculated as a percentage of return on investment, as defined in the agreements as the excess of the fair value of Harry Winston Inc. at the date of calculation, over the fair value of Harry Winston Inc. at April 2, 2004, adjusted for certain items as defined in the agreements. The 40% time-vested award vests on the six annual anniversaries of each executive’s designated start date and over the six-year period, the vesting percentages are 0%, 0%, 10%, 10%, 10% and 10%, respectively. The 60% cliff-vested award vests in full on the date that Harry Winston Diamond Corporation becomes the acquirer of 100% of the common stock of Harry Winston Inc. The executives must remain employed by Harry Winston Inc. through the vesting dates in order for the awards to vest. Both awards would vest immediately upon the date of any future change in control as defined in the employment agreements. On September 29, 2006, Harry Winston Diamond Corporation acquired 100% of the common stock of Harry Winston Inc. As a result, the cliff-vested award has vested. At January 31, 2008 and 2007, Harry Winston Inc. has recorded a liability of $6.3 million and $7.2 million, respectively, relating to the Plan.

At January 21, 2008 and 2007, Harry Winston Inc. has recorded a liability of $5.8 million and $4.8 million, respectively, in connection with a deferred compensation plan for a key executive. According to the terms of this plan, the executive is entitled to deferred compensation of $5.0 million, which vests in equal installments on the first through the third anniversaries of the executive’s first day of employment with Harry Winston Inc. On each vesting date, the vested portion of the deferred compensation will be paid to the executive unless the executive provides Harry Winston Inc. with prior written notice to defer receipt of all or a portion of the vested portion of the deferred compensation. All such vested amounts deferred at the request of the executive will be distributed to the executive upon the executive’s termination of employment with Harry Winston Inc. The deferred compensation bears interest at LIBOR.

NOTE 19:
Related Parties

Transactions with related parties for the twelve months ended January 31, 2008 include $1.8 million payable of rent (2007 – $1.8 million) relating to the New York salon, payable to a Harry Winston Inc. employee.

NOTE 20: Insurance Settlement

During the third quarter of fiscal 2008, approximately $23.2 million in Company-owned retail inventory at cost was stolen during a robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $13.5 million in the fourth quarter on settlement of the insurance claim.

NOTE 21: Subsequent Events

On March 14, 2008, the Company completed a common share private placement. The non-brokered private placement sold 3 million common shares at CDN $25 per share. No fees or commissions were payable on this transaction which generated net proceeds of CDN $75.0 million. This transaction diluted the Company’s issued and outstanding shares by 5%.

On February 22, 2008, Harry Winston Inc. entered into a credit agreement with a syndicate of banks for $250.0 million, five-year revolving credit facility. No scheduled repayments are required before the maturity date.

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56

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

NOTE 22:
Segmented Information

The Company operates in two segments within the diamond industry, mining and retail, as of January 31, 2008.

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

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

For the twelve months ended January 31, 2008		Mining		Retail		Total
Revenue
Canada	$	413,772	$	–	$	413,772
United States		–		112,453		112,453
Europe		–		81,429		81,429
Asia		–		71,653		71,653
Cost of sales		169,680		141,507		311,187
Gross margin		244,092		124,028		368,120
Gross margin (%)		59.0%		46.7%		54.2%
Selling, general and administrative expenses		23,359		127,086		150,445
Earnings (loss) from operations		220,733		(3,058)		217,675
Interest and financing expenses		(14,940)		(12,918)		(27,858)
Other income		2,326		432		2,758
Insurance settlement		–		13,488		13,488
Foreign exchange gain (loss)		(45,042)		1,651		(43,391)
Segmented earnings (loss) before income taxes	$	163,077	$	(405)	$	162,672
Segmented assets as at January 31, 2008
Canada	$	856,841	$	–	$	856,841
United States		–		459,525		459,525
Other foreign countries		22,466		155,116		177,582
	$	879,307	$	614,641	$	1,493,948
Goodwill as at January 31, 2008	$	–	$	93,780	$	93,780
Capital expenditures	$	163,312	$	38,533	$	201,845
Other significant non-cash items:
Income tax expense (recovery)	$	13,874	$	(5,296)	$	8,578
Amortization and accretion	$	71,840	$	9,334	$	81,174

For the twelve months ended January 31, 2007		Mining		Retail		Total
Revenue
Canada	$	332,573	$	–	$	332,573
United States		–		97,989		97,989
Europe		–		75,092		75,092
Asia		–		53,139		53,139
Cost of sales		166,879		118,619		285,498
Gross margin		165,694		107,601		273,295
Gross margin (%)		49.8%		47.6%		48.9%
Selling, general and administrative expenses		21,222		105,314		126,536
Earnings from operations		144,472		2,287		146,759
Interest and financing expenses		(13,008)		(8,142)		(21,150)
Other income (expense)		5,323		(242)		5,081
Foreign exchange gain (loss)		9,775		(991)		8,784
Segmented earnings (loss) before income taxes	$	146,562	$	(7,088)	$	139,474
Segmented assets as at January 31, 2007
Canada	$	731,194	$	–	$	731,194
United States		–		451,934		451,934
Other foreign countries		14,775		90,011		104,786
	$	745,969	$	541,945	$	1,287,914
Goodwill as at January 31, 2007	$	–	$	98,142	$	98,142
Capital expenditures	$	100,325	$	19,579	$	119,904
Other significant non-cash items:
Income tax expense (recovery)	$	22,972	$	(2,905)	$	20,067
Amortization and accretion	$	62,553	$	6,175	$	68,728

Sales to one customer in the mining segment totalled $28.4 million (2007 – $29.0 million) for the twelve months ended January 31, 2008.

2008 ANNUAL REPORT

57

HARRY WINSTON DIAMOND CORPORATION

Diavik Diamond Mine Mineral Reserve
and Mineral Resource Statement

as of December 31, 2007

Proven and Probable Reserves

	Proven			Probable			Proven and Probable
	Millions	Carats	Millions	Millions	Carats	Millions	Millions	Carats	Millions
	of	per	of	of	per	of	of	per	of
Open pit and underground mining	tonnes	tonne	carats	tonnes	tonne	carats	tonnes	tonne	carats
A-154 South
Open Pit	1.2	5.8	7.1	0.7	7.3	5.0	1.9	6.3	12.2
Underground	–	–	–	3.0	4.9	14.8	3.0	4.9	14.8
Total A-154 South	1.2	5.8	7.1	3.7	5.4	19.8	4.9	5.5	27.0
A-154 North
Open Pit	0.1	3.3	0.3	–	–	–	0.1	3.3	0.3
Underground	2.8	2.3	6.3	5.9	2.2	12.7	8.7	2.2	19.0
Total A-154 North	2.9	2.3	6.6	5.9	2.2	12.7	8.7	2.2	19.3
A-418
Open Pit	4.3	3.4	14.6	–	–	–	4.3	3.4	14.6
Underground	0.5	4.2	2.1	3.5	4.1	14.2	3.9	4.1	16.3
Total A-418	4.8	3.4	16.6	3.5	4.1	14.2	8.3	3.7	30.9
Total
Open Pit	5.7	3.9	22.0	0.7	7.3	5.0	6.3	4.3	27.0
Underground	3.3	2.5	8.4	12.3	3.4	41.7	15.6	3.2	50.1
Total Reserves	9.0	3.4	30.3	13.0	3.6	46.7	21.9	3.5	77.1

Note: Totals may not add up due to rounding.

Additional Indicated and Inferred Resources

	Measured Resources			Indicated Resources			Inferred Resources
	Millions	Carats	Millions	Millions	Carats	Millions	Millions	Carats	Millions
	of	per	of	of	per	of	of	per	of
Kimberlite pipe	tonnes	tonne	carats	tonnes	tonne	carats	tonnes	tonne	carats
A-154 South	–	–	–	–	–	–	0.6	4.3	2.5
A-154 North	–	–	–	–	–	–	1.7	2.6	4.4
A-418	–	–	–	–	–	–	0.6	4.5	2.7
A-21	–	–	–	4.1	3.1	12.7	0.7	2.8	1.9
Total	–	–	–	4.1	3.1	12.7	3.6	3.2	11.5

Note: Totals may not add up due to rounding.

The above mineral reserve and mineral resource statement was prepared by Diavik Diamond Mines Inc., operator of the Diavik Mine, under the supervision of Calvin Yip, P.Eng., Manager, Strategic Planning of Diavik Diamond Mines Inc., a Qualified Person within the meaning of National Instrument 43-101 of the Canadian Securities Administrators.

For further details and information concerning Harry Winston Diamond Corporation’s Mineral Reserves and Resources, readers should reference Harry Winston Diamond Corporation’s Annual Information Form available through www.sedar.com and http://investor.harrywinston.com.

2008 ANNUAL REPORT

58

HARRY WINSTON DIAMOND CORPORATION

Harry Winston Retail Salons

United States	Las Vegas	Japan	Asia
Bal Harbour	The Forum Shops at Caesars	Nagoya	Beijing
Bal Harbour Shops	3500 Las Vegas Blvd South, Suite R25	1-1-6 Higashisakura	Peninsula Beijing Palace Hotel
9700 Collins Avenue, Suite 151	Las Vegas, Nevada 89109	Higashi-Ku	8 Goldfish Lane, Wangfujing
Bal Harbour, Florida 33154	Tel: 702.933.7370	Nagoya 461-0005, Japan	Beijing, 100006
Tel: 786.206.6657		Tel: 81.5.2950.5100	The People’s Republic of China
	New York		Tel: 861.0.8511.5595
Beverly Hills	718 Fifth Avenue	Osaka
310 North Rodeo Drive	New York, New York 10019	Shinsaibashi District	Hong Kong
Beverly Hills, California 90210	Tel: 212.245.2000	3-10-25, Minamisemba	The Peninsula Hotel
Tel: 310.271.8554		Chuo-Ku	Shop E8, G/F
	Toll free number for United States:	Osaka, 542-0081 Japan	Salisbury Road
Chicago	1.800.988.4110	Tel: 81.6.6281.8855	Tsimshatsui, Kowloon
55 East Oak Street			Hong Kong
Chicago, Illinois 60611	Europe	Tokyo – Ginza	Tel: 852.2301.2131
Tel: 312.705.1820	Geneva	1-8-14 Ginza, Chuo-Ku
	24 Quai General Guisan	Tokyo, Japan 104-0061	Taipei
Dallas	1204 Geneva, Switzerland	Tel: 81.3.3535.6441	Regent Hotel
19 Highland Park Village	Tel: 41.22.818.2000		2nd Fl., No 41, Sec 2,
Dallas, Texas 75205		Tokyo – Midtown	Chung Shan N Road
Tel: 214.647.5830	London	Roppongi District	104 Taipei, Taiwan
	171 New Bond Street	9-7-3, Akasaka, Minato-Ku	Tel: 886.2.2521.7808
Honolulu	London, England WIS-4RD	Tokyo, Japan 107-0052
Ala Moana Center	Tel: 44.207.907.8800	Tel: 81.3.5413.3400
1450 Ala Moana Blvd, Suite 2094
Honolulu, Hawaii 96814	Paris	Tokyo – Omotesando
Tel: 808.791.4000	29 Avenue Montaigne	Omotesando Hills
	75008 Paris, France	4-12-10, Jingumae Shibuya-ku
	Tel: 33.1.4720.0309	Tokyo, Japan 150-0001
		Tel: 81.3.5785.0440

Harry Winston Diamond Sales Offices

Belgium Sales Office	India Sales Office	Israel Sales Office
Harry Winston Diamond International N.V.	Harry Winston Diamond (India) Private Limited	Harry Winston Diamond (Israel) Ltd.
Formerly: Aber International N.V.	Formerly: Aber India Private Limited	Formerly: Aber Diamond Israel 2006 Ltd.
Diamantclub Van Antwerpen Suite 760,	606 C Wing, Dharam Palace	Maccabi Building
62 Pelikaanstraat	101–103, N.S. Patkar Marg	1 Jabotinsky Street, Suite 1441
Antwerp 2018, Belgium	Mumbai 400 007, India	Ramat Gan, 52520, Israel
Tel: +32.3.225.5315	Tel: +91.22.236.99004	Tel: 972.3.613.2424
Fax: +32.3.233.2165	Fax: +91.22.236.92299	Fax: 972.3.613.2040

2008 ANNUAL REPORT

59

HARRY WINSTON DIAMOND CORPORATION

Shareholder Information

Board of Directors	Senior Management	Transfer Agents & Registrars	Annual Meeting of Shareholders
Robert A. Gannicott	Robert A. Gannicott	Please direct inquiries concerning	The Fairmont Royal York Hotel
Chairman & Chief Executive Officer,	Chairman & Chief Executive Officer	shares, share transfers, dividend	100 Front Street West
Harry Winston Diamond Corporation		payments and change of address	Toronto, Ontario, Canada
Director since June 1992	Thomas J. O’Neill	to the Transfer Agent:	Wednesday, June 4, 2008
	President, Harry Winston		10:00 AM
Matthew W. Barrett	Diamond Corporation and	CIBC Mellon Trust Company
Corporate Director	Chief Executive Officer,	P.O. Box 7010	Corporate Offices
Director since January 2008	Harry Winston Inc.	Adelaide Street Postal Station	Harry Winston Diamond Corporation
		Toronto, Ontario, Canada	Formerly: Aber Diamond Corporation
Micheline Bouchard	Alan S. Mayne	M5C 2W9	P.O. Box 4569, Station A
Corporate Director	Vice President &	Toll free within Canada and	Toronto, Ontario, Canada
Director since January 2008	Chief Financial Officer	United States:	M5W 4T9
		1.800.387.0825	Tel: 416.362.2237
Lars-Eric Johansson	Susan Korb	Tel: 416.643.5500	Fax: 416.362.2230
Lead Director of the Board	Executive Vice President	Fax: 416.643.5501
Director since June 2003	Marketing/Design	e-mail: inquiries@cibcmellon.com	investor.harrywinston.com
		www.cibcmellon.com
Lyndon Lea	James R.W. Pounds		Harry Winston Inc.
Partner, Lion Capital LLP	Executive Vice President	Registrar and Transfer Company	Corporate Office
Director since December 2004	Buying/Sourcing	10 Commerce Drive	1330 Avenue of the Americas
		Cranford, New Jersey, 07016	New York, New York 10019
Laurent E. Momméja	Raymond N. Simpson	Toll free. 1800.368.5948	Tel: 212.315.7900
Managing Director of Hermès Maison	Executive Vice President	Tel: 908.497.2300	Fax: 212.581.2612
and President of La Compagnie		Fax: 908.497.2318
des Arts de la Table, a subsidiary	Beth Bandler	e-mail: info@rtco.com	harrywinston.com
of Hermès International	Senior Vice President &	www.rtco.com
Director since June 2004	General Counsel, Legal and
	Human Resources	Auditors
Thomas J. O’Neill		KPMG LLP
President, Harry Winston	Susan E. Munn	Chartered Accountants
Diamond Corporation and	Senior Vice President,	Suite 3300
Chief Executive Officer,	Security and Loss Prevention	Commerce Court West
Harry Winston Inc.		Toronto, Ontario, Canada
Director since July 2002	Robert A. Scott	M5L 1B2
	Chief Financial Officer,
J. Roger B. Phillimore	Harry Winston Inc.	Harry Winston Diamond Corporation Stock Trading History
Corporate Director		Toronto Stock Exchange: HW
Director since November 1994		New York Stock Exchange: HWD

John M. Willson Corporate Director		Feb. 1, 2007 to Jan. 31, 2008		Feb. 1, 2006 to Jan. 31, 2007
Director since January 2005			*NASDAQ/
		TSX CDN$	NYSE US$	TSX CDN$	NASDAQ US$
Corporate Secretary	High	48.36	45.18	49.35	43.14
Lyle R. Hepburn	Low	21.03	21.78	32.64	27.08
	Close	24.75	24.59	45.35	38.55
	Average daily volume	195,154	33,848	182,480	29,006
	*The Company delisted from NASDAQ on November 16, 2007, and listed on the New York Stock Exchange on November 19, 2007. New York Stock Exchange Disclosure Differences As a foreign private issuer, Harry Winston Diamond Corporation is required to disclose the significant ways in which its corporate governance practices differ from those followed by US domestic companies under NYSE listing standards. This disclosure can be obtained from the governance section of our website at investor.harrywinston.com

2008 ANNUAL REPORT

60

ABOVE:
Vintage diamond bracelet

BACK COVER:
Harry Winston engagement ring advertisement

HARRY WINSTON

HARRY WINSTON DIAMOND CORPORATION
WWW.HARRYWINSTON.COM