Quantcast
Last updated on April 20, 2014 at 8:28 EDT

Harry Winston Diamond Corporation Reports Fiscal 2013 Second Quarter Results

September 5, 2012

TORONTO, Sept. 5, 2012 /PRNewswire/ – Harry Winston Diamond Corporation (TSX:
HW, NYSE:HWD) (the “Company”) today announced its second quarter Fiscal
2013 results for the quarter ending July 31, 2012.

Robert Gannicott, Chairman and Chief Executive Officer stated, “This quarter has seen transaction numbers and margins grow in our
luxury goods segment even as we have withheld rough diamonds, from a
soft diamond market, rather than sell at depressed prices.”

Second Quarter Highlights:

        --  Consolidated sales decreased 20% to $176.9 million for the
            second quarter compared to $222.4 million for the comparable
            quarter of the prior year.  Operating profit was $16.4 million
            compared to $23.1 million in the comparable quarter of the
            prior year.  EBITDA decreased 24% to $33.4 million compared to
            $43.8 million in the comparable quarter of the prior year.
        --  For the mining segment rough diamond sales for the quarter
            decreased 31% to $61.5 million, versus $89.6 million in the
            comparable quarter of the prior year.  The decrease in sales
            resulted from a combination of a 24% decrease in volume of
            carats sold during the quarter and a 10% decrease in achieved
            rough diamond prices.
      o The 24% decrease in the quantity of carats sold was primarily the
        result of the Company's decision to hold some inventory until
        stability returns to the rough diamond market. Had the Company sold
        only the last production shipped for the second quarter, the
        estimated achieved price would have been approximately $104 per
        carat based on the prices achieved in the March/April 2012 sale
        adjusted down by 14% to reflect current market conditions.
      o The Company sold approximately 0.43 million carats for an average
        price of $142 per carat compared to approximately 0.57 million
        carats for an average price per carat of $157 in the comparable
        quarter of the prior year. The 10% decrease in the Company's
        achieved average rough diamond prices in the second quarter
        resulted from a decrease in the market price for rough diamonds
        from the peak achieved in July 2011, partially offset by the sale
        of the higher priced goods held back by the Company in the first
        quarter of fiscal 2013 due to an observed imbalance in the rough
        and polished diamond prices for these goods during that period.
        --  The Company had 0.7 million carats of rough diamond inventory
            with an estimated current market value of approximately $90
            million at July 31, 2012, of which approximately $65 million
            represents inventory available for sale.
        --  Rough diamond production for the calendar quarter ended July
            31, 2012 was 0.72 million carats (40% basis), which was
            consistent with the comparable period of the prior year.
        --  Luxury brand segment sales decreased 13% (11% at constant
            exchange rates) to $115.4 million compared to $132.8 million in
            the comparable quarter of the prior year.  Excluding high-value
            transactions from both periods, sales increased 25% in the
            second quarter versus the comparable quarter in the prior year.
        --  Operating profit for the luxury brand segment increased 16% to
            $8.0 million in the second quarter compared to $6.9 million in
            the comparable quarter of the prior year.  The increase in
            operating profit was primarily driven by positive product mix
            and a greater portion of high-value transactions in the
            comparable quarter of the prior year that generated
            lower-than-average gross margins.
        --  On August 30, 2012, the luxury brand segment refinanced its
            senior secured revolving credit facility by entering into a new
            secured five-year credit agreement with a consortium of banks
            led by Standard Chartered Bank establishing a $260 million
            facility for revolving credit loans. The facility has a
            maturity date of August 30, 2017.
        --  Consolidated net profit attributable to shareholders for the
            second quarter was $4.8 million or $0.06 per share compared to
            net profit attributable to shareholders of $10.0 million or
            $0.12 per share in the comparable quarter of the prior year.

Fiscal 2013 Second Quarter Financial Summary

(US$ in millions except Earnings per Share amounts)

     __________________________________________________________________
    |              | Three months | Three months |Six months|Six months|
    |              |    ended     |    ended     |  ended   |  ended   |
    |              |July 31, 2012 |July 31, 2011 | July 31, | July 31, |
    |              |              |              |  2012    |  2011    |
    |______________|______________|______________|__________|__________|
    |Sales         |      $176.9  |      $222.4  |   $369.4 |   $366.3 |
    |-    Mining   |       61.5   |       89.6   |   150.5  |   151.6  |
    |Segment       |      115.4   |      132.8   |   218.9  |   214.7  |
    |-    Luxury   |              |              |          |          |
    |Brand Segment |              |              |          |          |
    |______________|______________|______________|__________|__________|
    |Operating     |       16.4   |       23.1   |    35.0  |    27.8  |
    |profit (loss) |       11.7   |       18.5   |    28.1  |    22.5  |
    |-    Mining   |       8.0    |       6.9    |    15.1  |    11.1  |
    |Segment       |      (3.3)   |      (2.3)   |   (8.2)  |   (5.8)  |
    |-    Luxury   |              |              |          |          |
    |Brand Segment |              |              |          |          |
    |-    Corporate|              |              |          |          |
    |Segment       |              |              |          |          |
    |______________|______________|______________|__________|__________|
    |Net profit    |        4.8   |       10.0   |    16.4  |    13.6  |
    |attributable  |              |              |          |          |
    |to            |              |              |          |          |
    |shareholders  |              |              |          |          |
    |______________|______________|______________|__________|__________|
    |Earnings per  |      $0.06   |      $0.12   |   $0.19  |   $0.16  |
    |share         |              |              |          |          |
    |______________|______________|______________|__________|__________|

Complete financial statements, MD&A and a discussion of risk factors are
included in the accompanying release.

Outlook
The Company issued an updated life-of-mine plan in August for the Diavik
Diamond Mine with a $2.6 billion net asset value on a 100% basis based
on reserves and resources including A-21.

The plan for calendar 2012 Diavik Diamond Mine production remains at
approximately 8 million carats (100% basis). Looking beyond calendar
2012, the objective is to fully utilize processing capacity with a
combination of production from the underground portions of A-154 South,
A-154 North and A-418 supplemented by the A-21 open pit. The A-21
pre-feasibility study currently being undertaken assumes that the A-21
pipe will be mined with the open pit methods used for the other pipes.
A dike would be constructed similar to the two other pits but smaller
in size. Detailed plans are still being refined and optimized and no
underground mining is being planned. The capital expenditures are
estimated to be in the region of $500 million (100% basis) at an
assumed average Canadian/US dollar exchange rate of $1.00.

The Company expects the trend of wealth creation in emerging markets
combined with increasing tourism to remain key drivers of increasing
demand for luxury jewelry and watch products. Over the long term,
consumer brand loyalty for luxury products is expected to remain
strong. The Company is well positioned moving into the second half of
the year, supported by a strong advertising campaign and product
assortment, and its global distribution network in prime locations. A
new directly operated salon was opened in the Harrods department store
in London, England, in August 2012 and a directly operated salon is
expected to be opened early next year in Geneva, Switzerland. A new
licensed salon was opened in May in Moscow, Russia. In addition, a new
licensed salon is expected to be opened in Kuwait City, Kuwait in late
2013. The Company also plans to expand by 24 wholesale watch doors to
220 doors by the end of fiscal 2013.

Conference Call and Webcast
Beginning at 8:30AM (ET) on Thursday, September 6th, the Company will
host a conference call for analysts, investors and other interested
parties. Listeners may access a live broadcast of the conference call
on the Company’s investor relations web site at http://investor.harrywinston.com or by dialing 866-825-3354 within North America or 617-213-8063 from
international locations and entering passcode 42016423.

An online archive of the broadcast will be available by accessing the
Company’s investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the
call through 11:00PM (ET), Thursday, September 20, 2012 by dialing
888-286-8010 within North America or 617-801-6888 from international
locations and entering passcode 24805897.

About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium
assets in the mining and retail segments of the diamond industry. Harry
Winston supplies rough diamonds to the global market from its 40
percent ownership interest in the Diavik Diamond Mine. The Company’s
luxury brand segment is a premier diamond jeweler and luxury timepiece
retailer with salons in key locations, including New York, Paris,
London, Beijing, Shanghai, Hong Kong, Singapore, Tokyo and Beverly
Hills.

The Company focuses on the two most profitable segments of the diamond
industry, mining and retail, in which its expertise creates shareholder
value. This unique business model provides key competitive advantages;
rough diamond sales and polished diamond purchases provide market
intelligence that enhances the Company’s overall performance.

For more information, please visit www.harrywinston.com or for investor information, visit http://investor.harrywinston.com.

Highlights

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

Consolidated sales were $176.9 million for the second quarter compared
to $222.4 million for the comparable quarter of the prior year,
resulting in an operating profit of $16.4 million compared to $23.1
million in the comparable quarter of the prior year. Gross margin of
$72.2 million was consistent with the comparable quarter of the prior
year. Consolidated EBITDA was $33.4 million compared to $43.8 million
in the comparable quarter of the prior year. The Company had 0.7
million carats of rough diamond inventory with at an estimated current
market value of approximately $90 million at July 31, 2012, of which
approximately $65 million represents inventory available for sale.

The mining segment recorded sales of $61.5 million, a 31% decrease from
$89.6 million in the comparable quarter of the prior year. The decrease
in sales resulted from a combination of a 24% decrease in volume of
carats sold during the quarter and a 10% decrease in achieved rough
diamond prices. Rough diamond production during the second calendar
quarter was consistent with the comparable period of the prior year.
The mining segment recorded operating profit of $11.7 million compared
to $18.5 million in the comparable quarter of the prior year. EBITDA
for the mining segment was $24.9 million compared to $36.0 million in
the comparable quarter of the prior year.

The luxury brand segment recorded sales of $115.4 million, a decrease of
13% from sales of $132.8 million in the comparable quarter of the prior
year (a decrease of 11% at constant exchange rates). The second quarter
of the prior year included a greater portion of high-value transactions
compared to the current quarter that generated lower-than-average gross
margins. Operating profit was $8.0 million for the quarter compared to
$6.9 million in the same quarter of the prior year. EBITDA for the
luxury brand segment was $11.7 million compared to $10.0 million in the
comparable quarter of the prior year.

The corporate segment recorded selling, general and administrative
expenses of $3.4 million compared to $2.3 million in the comparable
quarter of the prior year.

The Company recorded a consolidated net profit attributable to
shareholders of $4.8 million or $0.06 per share for the quarter,
compared to a net profit attributable to shareholders of $10.0 million
or $0.12 per share in the second quarter of the prior year.

Management’s Discussion and Analysis

PREPARED AS OF SEPTEMBER 5, 2012 (ALL FIGURES ARE IN UNITED STATES
DOLLARS UNLESS OTHERWISE INDICATED)

The following is management’s discussion and analysis (“MD&A”) of the
results of operations for Harry Winston Diamond Corporation
(“Harry Winston Diamond Corporation”, or the “Company”) for the three
and six months ended July 31, 2012, and its financial position as at
July 31, 2012. This MD&A is based on the Company’s unaudited interim
condensed consolidated financial statements prepared in accordance with
International Financial Reporting Standards (“IFRS”) and should be read
in conjunction with the unaudited interim condensed consolidated
financial statements and notes thereto for the three and six months
ended July 31, 2012 and the audited consolidated financial statements
of the Company and notes thereto for the year ended January 31, 2012.
Unless otherwise specified, all financial information is presented in
United States dollars. Unless otherwise indicated, all references to
“second quarter” refer to the three months ended July 31. Unless
otherwise indicated, references to “international” for the luxury brand
segment refer to Europe and Asia.

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”, “foresee”, “appears”, “believe”, “intend”, “estimate”,
“predict”, “potential”, “continue”, “objective”, “modeled”, “hope” or
other similar expressions concerning matters that are not historical
facts. Forward-looking information may relate to management’s future
outlook and anticipated events or results, and may include statements
or information regarding plans, timelines and targets for construction,
mining, development, production and exploration activities at the
Diavik Diamond Mine, future mining and processing at the Diavik Diamond
Mine, projected capital expenditure requirements and the funding
thereof, liquidity and working capital requirements and sources,
estimated reserves and resources at, and production from, the Diavik
Diamond Mine, the number and timing of expected rough diamond sales,
the demand for rough diamonds, expected diamond prices and expectations
concerning the diamond industry and the demand for luxury goods,
expected cost of sales and gross margin trends in the mining segment,
targets for compound annual growth rates of sales and operating income
in the luxury brand segment, plans for expansion of the luxury brand
retail salon network, and expected sales trends and market conditions
in the luxury brand segment. Actual results may vary from the
forward-looking information. See “Risks and Uncertainties” on page 18
for material risk factors that could cause actual results to differ
materially from the forward-looking information.

Forward-looking information is based on certain factors and assumptions
regarding, among other things, mining, production, construction and
exploration activities at the Diavik Diamond Mine, world and US
economic conditions, and the worldwide demand for luxury goods.
Specifically, in making statements regarding expected diamond prices
and expectations concerning the diamond industry and expected sales
trends and market conditions in the luxury brand segment, the Company
has made assumptions regarding, among other things, the state of world
and US economic conditions, worldwide diamond production levels, and
demand for luxury goods. While the Company considers these assumptions
to be reasonable based on the information currently available to it,
they may prove to be incorrect. See “Risks and Uncertainties” on page
18.

Forward-looking information is subject to certain factors, including
risks and uncertainties, which could cause actual results to differ
materially from what we currently expect. These factors include, among
other things, the uncertain nature of mining activities, including
risks associated with underground construction and mining operations,
risks associated with joint venture operations, including risks
associated with the inability to control the timing and scope of future
capital expenditures, and risks of changes to the mine plan for the
Diavik Diamond Mine, risks associated with the remote location of and
harsh climate at the Diavik Diamond Mine site, risks resulting from the
Eurozone financial crisis, risks associated with regulatory
requirements, fluctuations in diamond prices and changes in US and
world economic conditions, the risk of fluctuations in the Canadian/US
dollar exchange rate, cash flow and liquidity risks, the risks relating
to the Company’s expansion strategy and of competition in the luxury
jewelry business as well as changes in demand for high-end luxury
goods. Please see page 18 of this Interim Report, as well as the
Company’s current Annual Information Form, available at www.sedar.com,
for a discussion of these and other risks and uncertainties involved in
the Company’s operations.

Readers are cautioned not to place undue importance on forward-looking
information, which speaks only as of the date of this MD&A, 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 MD&A, actual
events may differ materially from current expectations. The Company
uses forward-looking statements because it believes such statements
provide useful information with respect to the expected future
operations and financial performance of the Company, and cautions
readers that the information may not be appropriate for other purposes.
While the Company may elect to, it is under no obligation and does not
undertake to update or revise any forward-looking information, whether
as a result of new information, future events or otherwise at any
particular time, except as required by law. Additional information
concerning factors that may cause actual results to materially differ
from those in such forward-looking statements is contained in the
Company’s filings with Canadian and United States securities regulatory
authorities and can be found at www.sedar.com and www.sec.gov, respectively.

Summary Discussion

Harry Winston Diamond Corporation is a diamond enterprise with premium
assets in the mining and retailing segments of the diamond industry.
The Company supplies rough diamonds to the global market from its 40%
ownership interest in the Diavik Diamond Mine, located in Canada’s
Northwest Territories. The Company’s luxury brand segment is a premier
diamond jeweler and luxury timepiece retailer with salons in key
locations including New York, Paris, London, Beijing, Shanghai, Tokyo,
Hong Kong and Beverly Hills.

The Company’s mining asset is an ownership interest in the Diavik group
of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
(“DDMI”) (60%) and Harry Winston Diamond Limited Partnership (“HWDLP”)
(40%) where HWDLP holds an undivided 40% ownership interest in the
assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is
the operator of the Diavik Diamond Mine. DDMI and HWDLP are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary
of Rio Tinto plc of London, England.

Market Commentary

The Diamond Market
During the second quarter, rough diamond prices declined due to three
factors: the buildup of stock in the cutting and polishing centres;
increasingly tight liquidity due to both continued economic instability
in Europe and the impact of the significant weakening of the Rupee
versus the US dollar on credit availability in India; and challenging
retail conditions in India and China. Conversely, the US and Japanese
retail markets continue to perform well despite softer conditions in
China. The mood within the diamond market remains cautious but it is
hoped that the Hong Kong International Jewellery Show will bring more
positive movement in retail diamond demand as the markets restock
before the Asian wedding and year-end holiday seasons.

The Luxury Jewelry and Timepiece Market
Luxury consumers have become increasingly cautious as a result of the
uncertainty in the global economy and volatility in the equity markets
and overall demand for luxury products has slowed as a result of the
continued economic instability in Europe and the lower economic growth
in export-driven emerging markets. However luxury retailers with strong
global distribution networks are benefitting from the trend of
increased tourism by wealthy consumers from emerging markets, which
continues to be a major factor supporting demand for luxury products
(the majority of luxury goods purchased by Chinese nationals are
purchased while abroad). In addition the market is benefiting from the
continued economic recovery in the US while the Japanese market has
experienced a strong increase in demand for luxury products compared
with the comparable period of the prior year, which was negatively
impacted by the earthquake and tsunami.

Condensed Consolidated Financial Results

The following is a summary of the Company’s consolidated quarterly
results for the eight quarters ended July 31, 2012 following the basis
of presentation utilized in its IFRS financial statements:


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

                                                                                                                             Six         Six
                                                                                                                          months      months
                                                                                                                           ended       ended
                                                                                                                            July        July
                            2013        2013        2012        2012        2012        2012        2011        2011         31,         31,

                              Q2          Q1          Q4          Q3          Q2          Q1          Q4          Q3        2012        2011

    Sales              $ 176,897   $ 192,461   $ 216,017   $ 119,716   $ 222,378   $ 143,932   $ 215,358   $ 140,877   $ 369,358   $ 366,310

    Cost of sales        104,694     119,134     129,807      75,524     150,177      96,452     141,391      84,765     223,828     246,629

    Gross margin          72,203      73,327      86,210      44,192      72,201      47,480      73,967      56,112     145,530     119,681

    Gross margin
    (%)                    40.8%       38.1%       39.9%       36.9%       32.5%       33.0%       34.3%       39.8%       39.4%       32.7%

    Selling,
    general and
    administrative
    expenses              55,819      54,669      55,500      46,155      49,101      42,795      52,722      41,282     110,488      91,896

    Operating
    profit (loss)         16,384      18,658      30,710     (1,963)      23,100       4,685      21,245      14,830      35,042      27,785

    Finance
    expenses             (4,028)     (3,880)     (3,481)     (4,040)     (5,183)     (3,983)     (3,727)     (3,835)     (7,908)     (9,166)

    Exploration
    costs                  (568)       (254)       (177)       (600)       (781)       (212)       (351)       (212)       (822)       (993)

    Finance and
    other
    income                    90          65          81         164          83         258         278          69         155         341

    Foreign
    exchange
    gain (loss)              153       (364)         458         436         288       (177)       1,392         135       (211)         111

    Profit (loss)
    before
    income taxes          12,031      14,225      27,591     (6,003)      17,507         571      18,837      10,987      26,256      18,078

    Income tax
    expense
    (recovery)             7,278       2,615      11,001     (1,272)       7,519     (3,027)       5,137     (2,410)       9,893       4,492

    Net profit
    (loss)             $   4,753   $  11,610   $  16,590   $ (4,731)   $   9,988   $   3,598   $  13,700   $  13,397   $  16,363   $  13,586

    Attributable
    to
    shareholders       $   4,755   $  11,610   $  16,602   $ (4,728)   $   9,986   $   3,596   $  13,693   $  12,657   $  16,365   $  13,582

    Attributable
    to non-
    controlling
    interest                 (2)           -        (12)         (3)           2           2           7         740         (2)           4

    Basic earnings
    (loss)
    per share          $    0.06   $    0.14   $    0.20   $  (0.06)   $    0.12   $    0.04   $    0.16   $    0.15   $    0.19   $    0.16

    Diluted
    earnings
    (loss)
    per share          $    0.06   $    0.14   $    0.19   $  (0.06)   $    0.12   $    0.04   $    0.16   $    0.15   $    0.19   $    0.16

    Cash dividends
    declared per
    share              $    0.00   $    0.00   $    0.00   $    0.00   $    0.00   $    0.00   $    0.00   $    0.00   $    0.00   $    0.00

    Total assets
    (i)                $   1,660   $   1,716   $   1,637   $   1,656   $   1,671   $   1,671   $   1,609   $   1,584   $   1,660   $   1,671

    Total
    long-term
    liabilities
    (i)                $     461   $     472   $     670   $     661   $     633   $     613   $     603   $     596   $     461   $     633

    Operating
    profit (loss)      $  16,384   $  18,658   $  30,710   $ (1,963)   $  23,100   $   4,685   $  21,245   $  14,830   $  35,042   $  27,785

    Depreciation
    and
    amortization
    (ii)                  16,980      25,546      27,512      23,121      20,716      20,291      24,635      18,657      42,527      41,007

    EBITDA (iii)       $  33,364   $  44,204   $  58,222   $  21,158   $  43,816   $  24,976   $  45,880   $  33,487   $  77,569   $  68,792

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

    (ii)   Depreciation and amortization included in cost of sales and
           selling, general and administrative expenses.

    (iii)  Earnings before interest, taxes, depreciation and amortization
           ("EBITDA"). See "Non-IFRS Measure" on page 17.

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

Three Months Ended July 31, 2012 Compared to Three Months Ended July 31,
2011

CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a second quarter consolidated net profit
attributable to shareholders of $4.8 million or $0.06 per share
compared to a net profit attributable to shareholders of $10.0 million
or $0.12 per share in the second quarter of the prior year.

CONSOLIDATED SALES
Sales for the second quarter totalled $176.9 million, consisting of
rough diamond sales of $61.5 million and luxury brand segment sales of
$115.4 million. This compares to sales of $222.4 million in the
comparable quarter of the prior year (rough diamond sales of $89.6
million and luxury brand segment sales of $132.8 million).
See “Segmented Analysis” on page 8 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s second quarter cost of sales was $104.7 million for a
gross margin of 40.8% compared to a cost of sales of $150.2 million and
a gross margin of 32.5% for the comparable quarter of the prior year.
The Company’s cost of sales includes costs associated with mining,
rough diamond sorting and luxury brand activities. See “Segmented
Analysis” on page 8 for additional information.

CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative (“SG&A”)
expenses include expenses for salaries and benefits, advertising and
marketing, rent and related costs. The Company incurred SG&A expenses
of $55.8 million for the second quarter, compared to $49.1 million in
the comparable quarter of the prior year.

Included in SG&A expenses for the second quarter was $3.0 million for
the mining segment compared to $3.5 million for the comparable quarter
of the prior year, $49.5 million for the luxury brand segment compared
to $43.3 million for the comparable quarter of the prior year, and $3.3
million for the corporate segment compared to $2.3 million for the
comparable quarter of the prior year. See “Segmented Analysis” on page
8 for additional information.

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $7.3 million during the
second quarter, compared to a net income tax expense of $7.5 million in
the comparable quarter of the prior year. The Company’s combined
federal and provincial statutory income tax rate for the quarter is
26.5%. There are a number of items that can significantly impact the
Company’s effective tax rate, including foreign currency exchange rate
fluctuations, the Northwest Territories mining royalty, earnings
subject to tax different than the statutory rate, and the recognition
of previously unrecognized benefits. As a result, the Company’s
recorded tax provision can be significantly different than the expected
tax provision calculated based on the statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. The Company’s functional and reporting
currency is US dollars; however, the calculation of income tax expense
is based on income in the currency of the country of origin. As such,
the Company is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US dollar. During
the second quarter, the Canadian dollar weakened against the US dollar.
As a result, the Company recorded an unrealized foreign exchange gain
of $3.0 million on the revaluation of the Company’s Canadian dollar
denominated deferred income tax liability. This compares to an
unrealized foreign exchange gain of $1.9 million in the comparable
quarter of the prior year. The unrealized foreign exchange gain is
recorded as part of the Company’s deferred income tax recovery, and is
not taxable for Canadian income tax purposes. During the second
quarter, the Company also recognized a deferred income tax expense of
$4.0 million for temporary differences arising from the difference
between the historical exchange rate and the current exchange rate
translation of foreign currency non-monetary items. This compares to a
deferred income tax expense of $4.0 million recognized in the
comparable quarter of the prior year. The recorded tax provision in the
comparable quarter of the prior year also included a net income tax
recovery of $1.2 million relating to foreign exchange differences
between income in the currency of the country of origin and the US
dollar.

The recorded tax provision of the second quarter included a reversal of
$1.0 million tax benefit that was recognized during the first quarter
in relation to deductible temporary differences previously not
recognized as deferred tax assets.

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
2032.

Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company’s effective tax rate
will fluctuate in future periods.

CONSOLIDATED FINANCE EXPENSES
Finance expenses of $4.0 million were incurred during the second quarter
compared to $5.2 million during the comparable quarter of the prior
year.

CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.6 million was incurred during the second
quarter compared to $0.8 million in the comparable quarter of the prior
year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the second
quarter, which was consistent with the comparable quarter of the prior
year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.2 million was recognized during the
second quarter compared to a net foreign exchange gain of $0.3 million
in the comparable quarter of the prior year. The Company does not
currently have any significant foreign exchange derivative instruments
outstanding.

Six Months Ended July 31, 2012 Compared to Six Months Ended July 31,
2011

CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a consolidated net profit attributable to
shareholders of $16.4 million or $0.19 per share for the six months
ended July 31, 2012, compared to a net profit attributable to
shareholders of $13.6 million or $0.16 per share in the comparable
period of the prior year.

CONSOLIDATED SALES
Sales totalled $369.4 million for the six months ended July 31, 2012,
consisting of rough diamond sales of $150.5 million and luxury brand
segment sales of $218.9 million. This compares to sales of $366.3
million in the comparable period of the prior year (rough diamond sales
of $151.6 million and luxury brand segment sales of $214.7 million).
See “Segmented Analysis” on page 8 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s cost of sales was $223.8 million for the six months ended
July 31, 2012, for a gross margin of 39.4% compared to a cost of sales
of $246.6 million and a gross margin of 32.7% for the comparable period
of the prior year. The Company’s cost of sales includes costs
associated with mining, rough diamond sorting and luxury brand
activities. See “Segmented Analysis” on page 8 for additional
information.

CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries
and benefits, advertising and marketing, rent and related costs. The
Company incurred SG&A expenses of $110.5 million for the six months
ended July 31, 2012, compared to $91.9 million in the comparable period
of the prior year.

Included in SG&A expenses for the six months ended July 31, 2012, was
$5.5 million for the mining segment compared to $8.1 million for the
comparable period of the prior year, $96.8 million for the luxury brand
segment compared to $78.0 million for the comparable period of the
prior year, and $8.2 million for the corporate segment compared to $5.8
million for the comparable period of the prior year. See “Segmented
Analysis” on page 8 for additional information.

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $9.9 million during the
six months ended July 31, 2012, compared to a net income tax expense of
$4.5 million in the comparable period of the prior year. The Company’s
combined federal and provincial statutory income tax rate for the six
months ended July 31, 2012 is 26.5%. There are a number of items that
can significantly impact the Company’s effective tax rate, including
foreign currency exchange rate fluctuations, the Northwest Territories
mining royalty, earnings subject to tax different than the statutory
rate, and the recognition of previously unrecognized benefits. As a
result, the Company’s recorded tax provision can be significantly
different than the expected tax provision calculated based on the
statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency
exchange rate fluctuations. The Company’s functional and reporting
currency is US dollars; however, the calculation of income tax expense
is based on income in the currency of the country of origin. As such,
the Company is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US dollar. During
the six months ended July 31, 2012, the Canadian dollar did not move
against the US dollar. As a result, the Company did not record any
unrealized foreign exchange gain or loss on the revaluation of the
Company’s Canadian dollar denominated deferred income tax liability.
This compares to an unrealized foreign exchange loss of $9.8 million in
the comparable period of the prior year. During the six months ended
July 31, 2012, the Company recognized a deferred income tax expense of
$2.5 million for temporary differences arising from the difference
between the historical exchange rate and the current exchange rate
translation of foreign currency non-monetary items. This compares to a
deferred income tax recovery of $8.6 million recognized in the
comparable period of the prior year. The recorded tax provision during
the six months ended July 31, 2012 also included a net income tax
recovery of $2.0 million relating to foreign exchange differences
between income in the currency of the country of origin and the US
dollar. This compares to a net income tax recovery of $3.2 million
recognized in the comparable period of the prior year.

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
2032.

Due to the number of factors that can potentially impact the effective
tax rate and the sensitivity of the tax provision to these factors, as
discussed above, it is expected that the Company’s effective tax rate
will fluctuate in future periods.

CONSOLIDATED FINANCE EXPENSES
Finance expenses of $7.9 million were incurred during the six months
ended July 31, 2012, compared to $9.2 million during the comparable
period of the prior year.

CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.8 million was incurred during the six months
ended July 31, 2012, compared to $1.0 million in the comparable period
of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.2 million was recorded during the six
months ended July 31, 2012, compared to $0.3 million in the comparable
period of the prior year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $0.2 million was recognized during the
six months ended July 31, 2012, compared to a net foreign exchange gain
of $0.1 million in the comparable period of the prior year. The Company
does not currently have any significant foreign exchange derivative
instruments outstanding.

Segmented Analysis
The operating segments of the Company include mining, luxury brand and
corporate segments. The corporate segment captures costs not
specifically related to operations of the mining or luxury brand
segments.

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


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

                                                                                                                         Six         Six
                                                                                                                      months      months
                                                                                                                       ended       ended
                                                                                                                        July        July
                             2013       2013        2012        2012       2012       2012       2011       2011         31,         31,

                               Q2         Q1          Q4          Q3         Q2         Q1         Q4         Q3        2012        2011

    Sales                                                                                                                               

      America            $  2,269   $  7,432   $   2,727   $   8,835   $    447   $  3,009   $  2,689   $  2,560   $   9,701   $   3,456

      Europe               50,514     54,370      78,846      21,993     80,131     50,752     75,715     50,353     104,884     130,883

      Asia                  8,690     27,207      20,659       5,411      9,030      8,274      4,293      7,795      35,897      17,304

    Total sales            61,473     89,009     102,232      36,239     89,608     62,035     82,697     60,708     150,482     151,643

    Cost of sales          46,784     70,099      72,783      34,112     67,613     53,443     61,822     45,039     116,883     121,056

    Gross margin           14,689     18,910      29,449       2,127     21,995      8,592     20,875     15,669      33,599      30,587

    Gross margin (%)        23.9%      21.2%       28.8%        5.9%      24.5%      13.9%      25.2%      25.8%       22.3%       20.2%

    Selling, general
    and
      administrative
    expenses                2,966      2,525       2,061       3,274      3,489      4,630      3,017      3,031       5,491       8,119

    Operating profit
    (loss)               $ 11,723   $ 16,385   $  27,388   $ (1,147)   $ 18,506   $  3,962   $ 17,858   $ 12,638   $  28,108   $  22,468

    Depreciation and
      amortization
    (i)                    13,160     22,172      24,284      19,932     17,461     17,083     20,669     15,428      35,332      34,544

    EBITDA (ii)          $ 24,883   $ 38,557   $  51,672   $  18,785   $ 35,967   $ 21,045   $ 38,527   $ 28,066   $  63,440   $  57,012

    (i)   Depreciation and amortization included in cost of sales and
          selling, general and administrative expenses.

    (ii)  Earnings before interest, taxes, depreciation and amortization
          ("EBITDA"). See "Non-IFRS Measure" on page 17.

Three Months Ended July 31, 2012 Compared to Three Months Ended July 31,
2011
MINING SALES
During the second quarter the Company sold approximately 0.43 million
carats for a total of $61.5 million for an average price per carat of
$142 compared to approximately 0.57 million carats for a total of $89.6
million for an average price per carat of $157 in the comparable
quarter of the prior year. The 24% decrease in the quantity of carats
sold was primarily the result of the Company’s decision to hold some
inventory until stability returns to the rough diamond market. The 10%
decrease in the Company’s achieved average rough diamond prices in the
second quarter resulted from a decrease in the market price for rough
diamonds from the peak achieved in July 2011, partially offset by the
sale of the higher priced goods held back by the Company in the first
quarter of fiscal 2013 due to an observed imbalance in the rough and
polished diamond prices for these goods during that period.

Had the Company sold only the last production shipped in the second
quarter, the estimated achieved price would have been approximately
$104 per carat based on the prices achieved in the March/April 2012
sale adjusted down by 14% to reflect current market conditions.

The Company expects that results for its mining segment will continue to
fluctuate depending on the seasonality of production at the Diavik
Diamond Mine, the number of sales events conducted during the quarter,
rough diamond prices and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine and sold by the
Company in each quarter.

MINING COST OF SALES AND GROSS MARGIN
The Company’s second quarter cost of sales was $46.8 million resulting
in a gross margin of 23.9% compared to a cost of sales of $67.6 million
and a gross margin of 24.5% in the comparable quarter of the prior
year. Cost of sales for the second quarter included $12.5 million of
depreciation and amortization compared to $16.8 million in the
comparable quarter of the prior year. The mining gross margin is
anticipated to fluctuate between quarters, resulting from variations in
the specific mix of product sold during each quarter and rough diamond
prices.

A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. During the second quarter, the
Diavik cash cost of production was $40.6 million compared to $40.5
million in the comparable quarter of the prior year. Cost of sales also
includes sorting costs, which consists of the Company’s cost of
handling and sorting product in preparation for sales to third parties,
and depreciation and amortization, the majority of which is recorded
using the unit-of-production method over estimated proven and probable
reserves.

The Company’s MD&A refers to cash cost of production, a non-IFRS
performance measure, in order to provide investors with information
about the measure used by management to monitor performance. This
information is used to assess how well the Diavik Diamond Mine is
performing compared to the mine plan and prior periods. Cash cost of
production includes mine site operating costs such as mining,
processing and administration, but is exclusive of amortization,
capital, and exploration and development costs. Cash cost of production
does not have any standardized meaning prescribed by IFRS and differs
from measures determined in accordance with IFRS. This performance
measure is intended to provide additional information and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with IFRS. This measure is not necessarily
indicative of net profit or cash flow from operations as determined
under IFRS. The following table provides a reconciliation of cash cost
of production to the mining segment cost of sales disclosed in the
interim condensed consolidated financial statements for the three
months ended July 31, 2012 and 2011.


    (expressed in               Three months ended       Three months ended
    thousands of United              July 31, 2012            July 31, 2011
    States dollars)

    Diavik cash cost of       $             40,594     $             40,542
    production

    Private royalty                          1,089                    1,718

    Other cash costs                           602                      940

    Total cash cost of                      42,285                   43,200
    production

    Depreciation and                        16,015                   17,963
    amortization

    Total cost of                           58,300                   61,163
    production

    Adjusted for stock                    (11,516)                    6,450
    movements

    Total cost of sales       $             46,784     $             67,613

MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $0.5 million from the
comparable quarter of the prior year.

Six Months Ended July 31, 2012 Compared to Six Months Ended July 31,
2011
MINING SALES
During the six months ended July 31, 2012, the Company sold
approximately 1.45 million carats for a total of $150.5 million for an
average price per carat of $104 compared to approximately 1.04 million
carats for a total of $151.6 million for an average price per carat of
$146 in the comparable period of the prior year. The 39% increase in
the quantity of carats sold was primarily the result of the sale of
almost all of the remaining lower priced goods originally held back in
inventory by the Company at October 31, 2011 due to an oversupply in
the market at that time, along with higher production in the six-month
period compared to the same period of the prior year. The 29% decrease
in the Company’s achieved average rough diamond prices in the six-month
period resulted from a combination of two factors: first, the sale of
the lower priced goods originally held back in inventory by the Company
at October 31, 2011; and second, a decrease in the market price for
rough diamonds from the peak achieved in the comparable period of the
prior year.

MINING COST OF SALES AND GROSS MARGIN
The Company’s cost of sales was $116.9 million during the six months
ended July 31, 2012, resulting in a gross margin of 22.3% compared to a
cost of sales of $121.1 million and a gross margin of 20.2% in the
comparable period of the prior year. Cost of sales for the six months
ended July 31, 2012, included $34.0 million of depreciation and
amortization compared to $33.2 million for the comparable period of the
prior year. The mining gross margin is anticipated to fluctuate between
quarters, resulting from variations in the specific mix of product sold
during each quarter and rough diamond prices.

A substantial portion of cost of sales is mining operating costs, which
are incurred at the Diavik Diamond Mine. During the six months ended
July 31, 2012, the Diavik cash cost of production was $84.6 million
compared to $85.1 million in the comparable period of the prior year.
Cost of sales also includes sorting costs, which consists of the
Company’s cost of handling and sorting product in preparation for sales
to third parties, and depreciation and amortization, the majority of
which is recorded using the unit-of-production method over estimated
proven and probable reserves.

The following table provides a reconciliation of cash cost of production
to the mining segment cost of sales disclosed in the interim condensed
consolidated financial statements for the six months ended July 31,
2012 and 2011.


    (expressed in thousands         Six months ended       Six months ended
    of United States                   July 31, 2012          July 31, 2011
    dollars)

    Diavik cash cost of           $           84,630     $           85,132
    production

    Private royalty                            3,727                  3,296

    Other cash costs                           2,031                  1,946

    Total cash cost of                        90,388                 90,374
    production

    Depreciation and                          29,786                 33,686
    amortization

    Total cost of                            120,174                124,060
    production

    Adjusted for stock                       (3,291)                (3,004)
    movements

    Total cost of sales           $          116,883     $          121,056

MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $2.6 million from the
comparable period of the prior year primarily due to executive
severance incurred in the first quarter of the prior year.

MINING SEGMENT OPERATIONAL UPDATE
Ore production for the second calendar quarter consisted of 1.5 million
carats produced from 0.44 million tonnes of ore from the A-418
kimberlite pipe, 0.2 million carats produced from 0.07 million tonnes
of ore from the A-154 North kimberlite pipe, and 0.1 million carats
produced from 0.03 million tonnes of ore from the A-154 South
kimberlite pipe. During the second calendar quarter, there was no
production from reprocessed plant rejects (“RPR”). RPR are not included
in the Company’s reserves and resource statement and are therefore
incremental to production. Rough diamond production was consistent with
the comparable calendar quarter of the prior year.

HARRY WINSTON DIAMOND LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND
MINE PRODUCTION

(reported on a one-month lag)


                              Three      Three            Six            Six
                             months     months         months         months
                              ended      ended          ended          ended
                               June       June           June           June
                                30,        30,            30,            30,
                               2012       2011           2012           2011

    Diamonds                    716        716          1,359          1,256
    recovered
    (000s carats)

    Grade                      3.34       3.29           3.19           3.06
    (carats/tonne)

During the second quarter, the Company expanded its Mumbai, India,
office to the Bharat Diamond Bourse in Bandra, India. The new office
will continue to support the Company’s polished buying and rough
sorting and sales expansion in India.

Mining Segment Outlook

PRODUCTION
The plan for calendar 2012 foresees Diavik Diamond Mine production
remaining at approximately 8 million carats from the mining of 2.0
million tonnes of ore and processing of 2.2 million tonnes of ore. Open
pit mining of approximately 1.0 million tonnes is expected to be
exclusively from A-418. Underground mining of approximately 1.0 million
tonnes is expected to be sourced principally from the A-154 South and
A-154 North kimberlite pipes with some production from A-418 in the
latter half of the year. Included in the estimated production for
calendar 2012 is approximately 1.0 million carats from RPR and 0.1
million carats from the implementation of an improved recovery process
for small diamonds. These RPR and small diamond recoveries are not
included in the Company’s reserves and resource statement and are
therefore incremental to production.

The Company issued an updated life-of-mine plan in August for the Diavik
Diamond Mine with a $2.6 billion net asset value on a 100% basis based
on reserves and resources including A-21.

Looking beyond calendar 2012, the objective is to fully utilize
processing capacity with a combination of production from the
underground portions of A-154 South, A-154 North and A-418 supplemented
by the A-21 open pit. The A-21 pre-feasibility study currently being
undertaken assumes that the A-21 pipe will be mined with the open pit
methods used for the other pipes. A dike would be constructed similar
to the two other pits but smaller in size. Detailed plans are still
being refined and optimized although no underground mining is being
planned. The capital expenditures are estimated to be in the region of
$500 million (100% basis) at an assumed average Canadian/US dollar
exchange rate of $1.00.

PRICING
Rough diamond prices have softened during the first six months of fiscal
2013. Based on prices from the Company’s last complete rough diamond
sale in March/April 2012 and the current diamond recovery profile of
the Diavik processing plant, the Company has modeled the approximate
average rough diamond price per carat as of March/April 2012 for each
of the Diavik ore types in the table that follows. The Company
estimates that with the softening rough diamond market, the current
market prices have declined by approximately 14% from March/April 2012.


                                            March/April 2012
                                           average price per
                                                       carat
    Ore type                                 (in US dollars)

    A-154 South                          $               160

    A-154 North                                          205

    A-418 A Type Ore                                     145

    A-418 B Type Ore                                     100

    RPR                                                   55

COST OF SALES AND CASH COST OF PRODUCTION
The Company expects cost of sales in fiscal 2013 to be approximately
$330 million. Included in this amount is depreciation and amortization
of approximately $110 million at an assumed average Canadian/US dollar
exchange rate of $1.00. If the current softening of the rough diamond
market continues, the Company may elect to hold more rough diamond
inventory than normal at January 31, 2013. Depending on the amount of
rough diamond inventory carried over into fiscal 2014, a portion of the
$330 million cost of sales forecasted for fiscal 2013 would be
recognized in fiscal 2014. At July 31, 2012, the Company had
approximately 0.7 million carats of rough diamond inventory with an
estimated current market value of approximately $90 million, of which
approximately $65 million represents inventory available for sale.

The Company’s share of the cash cost of production at the Diavik Diamond
Mine for calendar 2012 is expected to be approximately $173 million at
an assumed average Canadian/US dollar exchange rate of $1.00.

CAPITAL EXPENDITURES
During fiscal 2013, HWDLP’s 40% share of the planned capital
expenditures at the Diavik Diamond Mine is expected to be approximately
$78 million at an assumed average Canadian/US dollar exchange rate of
$1.00. HWDLP’s share of capital expenditures was $14.8 million for the
three months ended July 31, 2012, and $30.4 million for the six months
ended July 31, 2012.

Luxury Brand
The luxury brand segment includes sales from 21 Harry Winston salons,
which are located in prime markets around the world, including eight
salons in the United States: New York, Beverly Hills, Bal Harbour,
Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa; five salons in
Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two salons
in Europe: Paris and London; and six salons in Asia outside of Japan:
Beijing, two in Shanghai, Taipei, Hong Kong and Singapore.


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

                                                                                                                          Six         Six
                                                                                                                       months      months
                                                                                                                        ended       ended
                                                                                                                         July        July
                            2013        2013        2012       2012        2012       2012        2011       2011         31,         31,

                              Q2          Q1          Q4         Q3          Q2         Q1          Q4         Q3        2012        2011

    Sales                                                                                                                                

      America          $  35,759   $  32,286   $  41,537   $ 28,817   $  27,183   $ 35,487   $  46,489   $ 20,977   $  68,045   $  62,670

      Europe              15,636      30,054      31,204     19,561      26,098     17,446      15,701     27,155      45,690      43,544

      Asia
      (excluding
      Japan)              33,956      20,385      17,272     13,133      59,056     14,354      50,817     16,671      54,341      73,410

      Japan               30,073      20,727      23,772     21,966      20,433     14,610      19,654     15,366      50,800      35,043

    Total sales          115,424     103,452     113,785     83,477     132,770     81,897     132,661     80,169     218,876     214,667

    Cost of sales         57,910      49,035      57,024     41,378      82,513     42,958      79,518     39,675     106,945     125,472

    Gross margin          57,514      54,417      56,761     42,099      50,257     38,939      53,143     40,494     111,931      89,195

    Gross margin
    (%)                    49.8%       52.6%       49.9%      50.4%       37.9%      47.5%       40.1%      50.5%       51.1%       41.6%

    Selling,
    general and
    administrative
    expenses              49,495      47,311      49,929     40,635      43,331     34,716      47,866     34,942      96,806      78,046

    Operating
    profit             $   8,019   $   7,106   $   6,832   $  1,464   $   6,926   $  4,223   $   5,277   $  5,552   $  15,125   $  11,149

    Depreciation
    and
    amortization
    (i)                    3,681       3,235       3,089      3,048       3,115      3,069       3,688      2,882       6,916       6,184

    EBITDA (ii)        $  11,700   $  10,341   $   9,921   $  4,512   $  10,041   $  7,292   $   8,965   $  8,434   $  22,041   $  17,333

    (i)   Depreciation and amortization included in cost of sales and
          selling, general and administrative expenses.

    (ii)  Earnings before interest, taxes, depreciation and amortization
          ("EBITDA"). See "Non-IFRS Measure" on page 17.

Three Months Ended July 31, 2012 Compared to Three Months Ended July 31,
2011

LUXURY BRAND SALES
Sales for the second quarter were $115.4 million compared to $132.8
million for the comparable quarter of the prior year, a decrease of 13%
(a decrease of 11% at constant exchange rates). Sales in America
increased 32% to $35.8 million, European sales decreased 40% to $15.6
million, sales in Asia (excluding Japan) decreased 43% to $34.0 million
and sales in Japan increased 47% to $30.1 million, each as compared to
the comparable quarter of the prior year. The second quarter of the
prior year included a high-value transaction in Asia (excluding Japan)
that was not repeated in the current quarter. The Japanese market
continued to rebound strongly from the impact of the earthquake and
tsunami that occurred in early 2011. During the second quarter, there
were $19.1 million of high-value transactions, which generally carry
lower-than-average gross margins, compared with $55.6 million in the
comparable quarter of the prior year. The total number of units sold
increase by 40% over the comparable quarter of the prior year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the second quarter was
$57.9 million compared to $82.5 million for the comparable quarter of
the prior year. Gross margin for the quarter was $57.5 million or 49.8%
compared to $50.3 million or 37.9% for the second quarter of the prior
year. The improvement in gross margin was primarily due to product mix
and a greater portion of high-value transactions in the comparable
quarter of the prior year that generated lower-than-average gross
margins.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 14% to $49.5 million from $43.3 million in
the comparable quarter of the prior year. The increase was due
primarily to higher advertising, marketing and selling expenses. Fixed
costs accounted for $4.3 million of the increase, while variable
expenses linked to volume of sales accounted for $1.9 million of the
increase. Fixed costs include salaries and benefits, advertising and
marketing, rent and related costs and depreciation and amortization.
SG&A expenses included depreciation and amortization expense of $3.4
million compared to $3.0 million in the comparable quarter of the prior
year.

Six Months Ended July 31, 2012 Compared to Six Months Ended July 31,
2011

LUXURY BRAND SALES
Sales for the six months ended July 31, 2012, were $218.9 million
compared to $214.7 million for the comparable period of the prior year,
an increase of 2% (4% at constant exchange rates). Sales in America
increased 9% to $68.0 million, European sales increased 5% to $45.7
million, sales in Asia (excluding Japan) decreased 26% to $54.3 million
and sales in Japan increased 45% to $50.8 million, each as compared to
the comparable period of the prior year. The comparable period of the
prior year included high-value transactions in Asia (excluding Japan)
that were not repeated in the current period. The Japanese market
continued to rebound strongly from the impact of the earthquake and
tsunami that occurred in early 2011. During the six months ended July
31, 2012, there were $19.1 million of high-value transactions, which
generally carry lower-than-average gross margins, compared with $60.8
million in the comparable period of the prior year. The total number of
units sold increase by 43% over the comparable period of the prior
year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the six months ended July
31, 2012, was $106.9 million compared to $125.5 million for the
comparable period of the prior year. Gross margin for the six months
ended July 31, 2012, was $111.9 million or 51.1% compared to $89.2
million or 41.6% for the comparable period of the prior year. The
improvement in gross margin was primarily due to product mix and a
greater portion of high-value transactions in the comparable period of
the prior year that generated lower-than-average gross margins.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 24% to $96.8 million from $78.0 million in
the comparable period of the prior year. The increase was due primarily
to higher advertising, marketing and selling expenses. Fixed costs
accounted for $14.9 million of the increase, while variable expenses
linked to volume of sales accounted for $3.9 million of the increase.
Fixed costs include salaries and benefits, advertising and marketing,
rent and related costs and depreciation and amortization. SG&A expenses
included depreciation and amortization expense of $6.3 million compared
to $6.0 million in the comparable quarter of the prior year.

LUXURY BRAND SEGMENT OPERATIONAL UPDATE
The luxury brand segment opened a new directly operated salon in the
Harrods department store in London, England, in August. A new licensed
salon was opened in May in Moscow, Russia. In addition, the Company has
entered into a lease to open a new directly operated salon on Rue du
Rhone in Geneva, Switzerland. This salon is expected to open in early
calendar 2013. At July 31, 2012, the luxury brand segment’s
distribution network consisted of 21 directly operated salons, five
licensed salons (in Manila, Philippines; Kiev, Ukraine; Moscow, Russia;
and two in Dubai, United Arab Emirates) and 196 wholesale watch doors
around the world.

On August 30, 2012, the Company’s luxury brand subsidiary, Harry Winston
Inc., refinanced its senior secured revolving credit facility by
entering into a new secured five-year credit agreement with a
consortium of banks led by Standard Chartered Bank establishing a $260
million facility for revolving credit loans. The facility has a
maturity date of August 30, 2017.

Luxury Brand Segment Outlook
The Company expects the trend of wealth creation in emerging markets
combined with increasing tourism to remain key drivers of increasing
demand for luxury jewelry and watch products. Over the long term,
consumer brand loyalty for luxury products is expected to remain
strong. In the near term, the sovereign debt crisis in Europe and the
resulting slower growth in the export-driven emerging markets represent
challenges that could impact demand for luxury jewelry and watch
products. The Company is well positioned moving into the second half of
the year, supported by a strong advertising campaign and product
assortment, and its global distribution network in prime locations. A
new directly operated salon was opened in the Harrods department store
in London, England, in August 2012 and a directly operated salon is
expected to be opened early next year in Geneva, Switzerland. In
addition, a new licensed salon is expected to be opened in Kuwait City,
Kuwait in late fiscal 2013. The Company also plans to expand by 24
wholesale watch doors to 220 doors by the end of fiscal 2013. The
luxury brand segment continues to make strategic investments in the
brand in the areas of new product development, systems, training and
infrastructure, new distribution offices in Hong Kong, Hong Kong, and
Miami, US, as well as new salons in China. SG&A expenses are planned to
increase through fiscal year 2014 and then plateau as the luxury brand
segment begins to leverage its fixed costs. It is expected that through
this period of investment, the brand will continue to grow, however the
true benefits of this investment will be achieved beginning in fiscal
2015, when the luxury brand segment begins to leverage its fixed
costs.

Corporate
The corporate segment captures costs not specifically related to
operations of the mining or luxury brand segments.


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

                                                                                                                               Six         Six
                                                                                                                            months      months
                                                                                                                             ended       ended
                                                                                                                              July        July
                              2013        2013        2012        2012        2012        2012        2011        2011         31,         31,

                                Q2          Q1          Q4          Q3          Q2          Q1          Q4          Q3        2012        2011

    Sales                $       -   $       -   $       -   $       -   $       -   $       -   $       -   $       -   $       -   $       -

    Cost of sales                -           -           -          34          51          51          51          51           -         101

    Gross margin                 -           -           -        (34)        (51)        (51)        (51)        (51)           -       (101)

    Gross margin
    (%)                         -%          -%          -%          -%          -%          -%          -%          -%          -%          -%

    Selling,
    general and
    administrative
    expenses                 3,358       4,833       3,510       2,246       2,281       3,449       1,839       3,309       8,191       5,731

    Operating loss       $ (3,358)   $ (4,833)   $ (3,510)   $ (2,280)   $ (2,332)   $ (3,500)   $ (1,890)   $ (3,360)   $ (8,191)   $ (5,832)

    Depreciation
    and
    amortization
    (i)                        139         139         139         141         140         139         278         347         279         279

    EBITDA (ii)          $ (3,219)   $ (4,694)   $ (3,371)   $ (2,139)   $ (2,192)   $ (3,361)   $ (1,612)   $ (3,013)   $ (7,912)   $ (5,553)

    (i)   Depreciation and amortization included in cost of sales and
          selling, general and administrative expenses.

    (ii)  Earnings before interest, taxes, depreciation and amortization
          ("EBITDA"). See "Non-IFRS Measure" on page 17.

Three Months Ended July 31, 2012 Compared to Three Months Ended July 31,
2011

CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $1.1 million from
the comparable quarter of the prior year due to travel expenses and
salaries and benefits related to additional corporate employees.

Six Months Ended July 31, 2012 Compared to Six Months Ended July 31,
2011

CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.5 million from
the comparable period of the prior year due to severance costs and to
travel expenses and salaries and benefits related to additional
corporate employees.

Liquidity and Capital Resources

Working Capital
As at July 31, 2012, the Company had unrestricted cash and cash
equivalents of $74.6 million compared to $78.1 million at January 31,
2012. The Company had cash on hand and balances with banks of $69.3
million and short-term investments of $5.3 million at July 31, 2012.

During the quarter ended July 31, 2012, the Company reported cash from
operations of $8.6 million compared to $36.4 million in the comparable
quarter of the prior year. The decrease resulted primarily from the
Company’s decision to hold rough diamond inventory due to market
conditions. At July 31, 2012, the Company had 0.7 million carats of
rough diamond inventory with an estimated current market value of
approximately $90 million, of which approximately $65 million
represents inventory available for sale.

Working capital decreased to $241.9 million at July 31, 2012 from
$439.0 million at January 31, 2012. As at July 31, 2012, current
liabilities include $204.0 million relating to the luxury brand
segment’s five-year revolving credit facility (January 31, 2012 -
$nil), which was originally to mature on March 31, 2013, but which was
refinanced on August 30, 2012. During the quarter, the Company
increased accounts receivable by $3.0 million, decreased other current
assets by $6.3 million, decreased inventory and supplies by
$4.4 million, decreased trade and other payables by $17.1 million and
decreased employee benefit plans by $1.0 million.

The Company’s liquidity requirements fluctuate from quarter to quarter
depending on, among other factors, the seasonality of production at the
Diavik Diamond Mine, seasonality of mine operating expenses, capital
expenditure programs, the number of rough diamond sales events
conducted during the quarter and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine
and sold by the Company in each quarter, along with the seasonality of
sales and salon expansion in the luxury brand segment. The Company’s
principal working capital needs include investments in inventory, other
current assets, and trade and other payables and income taxes payable.

The Company assesses liquidity and capital resources on a consolidated
basis. The Company’s requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements for the next twelve
months.

Financing Activities
The mining segment maintains a senior secured revolving credit facility
with Standard Chartered Bank. At July 31, 2012, $50.0 million was
outstanding.

As at July 31, 2012, $6.6 million and $nil was outstanding under the
Company’s revolving financing facility relating to its Belgian
subsidiary, Harry Winston Diamond International N.V., and its Indian
subsidiary, Harry Winston Diamond (India) Private Limited,
respectively, compared to $nil and $4.3 million at January 31, 2012.

During the quarter, the Company’s luxury brand subsidiary, Harry Winston
Inc., increased the amount outstanding on its secured five-year
revolving credit facility to $204.0 million from $200.5 million at
January 31, 2012. On August 30, 2012, Harry Winston Inc. refinanced its
senior secured revolving credit facility by entering into a new secured
five-year credit agreement with a consortium of banks led by Standard
Chartered Bank establishing a $260 million facility for revolving
credit loans. The facility has a maturity date of August 30, 2017.

Investing Activities
During the quarter, the Company purchased property, plant and equipment
of $17.8 million, of which $15.8 million was purchased for the mining
segment and $2.0 million for the luxury brand segment.

Contractual Obligations
The Company has contractual payment obligations with respect to
interest-bearing loans and borrowings and, through its participation in
the Joint Venture, future site restoration costs at the Diavik Diamond
Mine level. Additionally, at the Joint Venture level, contractual
obligations exist with respect to operating purchase obligations, as
administered by DDMI, the operator of the mine. In order to maintain
its 40% ownership interest in the Diavik Diamond Mine, HWDLP is
obligated to fund 40% of the Joint Venture’s total expenditures on a
monthly basis. Not reflected in the table below are capital
expenditures for the calendar years 2012 to 2016 of approximately
$140 million assuming a Canadian/US average exchange rate of $1.00 for
each of the five years relating to HWDLP’s current projected share of
the planned capital expenditures excluding the A-21 pipe at the Diavik
Diamond Mine. The most significant contractual obligations for the
ensuing five-year period can be summarized as follows:


    Contractual                               Less          Year          Year         After
    Obligations                               than

    (expressed in              Total        1 year           2-3           4-5       5 years
    thousands of
    United States
    dollars)

    Interest-bearing       $ 355,069     $  42,404     $  70,442     $ 223,955     $  18,268
    loans and
    borrowings (a)
    (b)

    Environmental             93,322        82,668         4,844             -         5,810
    and
    participation
    agreements
    incremental
    commitments (c)

    Operating lease          261,447        26,581        54,140        47,952       132,774
    obligations (d)

    Total                  $ 709,838     $ 151,653     $ 129,426     $ 271,907     $ 156,852
    contractual
    obligations

(a) Interest-bearing loans and borrowings presented in the foregoing
table include current and long-term portions. The mining segment
maintains a senior secured revolving credit facility with Standard
Chartered Bank for $125.0 million. The facility has an initial maturity
date of June 24, 2013 with two one-year extensions at the Company’s
option. There are no scheduled repayments required before maturity. At
July 31, 2012, $50.0 million was outstanding.

The Company has available a $45.0 million revolving financing facility
(utilization in either US dollars or Euros) with Antwerp Diamond Bank
for inventory and receivables funding in connection with marketing
activities through its Belgian subsidiary, Harry Winston Diamond
International N.V., and its Indian subsidiary, Harry Winston Diamond
(India) Private Limited. Borrowings under the Belgian facility bear
interest at the bank’s base rate plus 1.5%. Borrowings under the Indian
facility bear an interest rate of 12.50%. At July 31, 2012, $6.6
million and $nil were outstanding under this facility relating to its
Belgian subsidiary, Harry Winston Diamond International N.V., and its
Indian subsidiary, Harry Winston Diamond (India) Private Limited,
respectively. The facility is guaranteed by Harry Winston Diamond
Corporation.

Harry Winston Inc. maintains a credit agreement with a syndicate of
banks for a $250.0 million five-year revolving credit facility, which
expires on March 31, 2013. There are no scheduled repayments required
before maturity. At July 31, 2012, $204.0 million had been drawn
against this secured credit facility.

On August 30, 2012, Harry Winston Inc. refinanced its secured revolving
credit facility by entering into a new secured five-year credit
agreement with a consortium of banks led by Standard Chartered Bank
establishing a $260.0 million facility for revolving credit loans. The
new facility expires on August 30, 2017. There are no scheduled
repayments required before maturity. The new credit facility is
available to Harry Winston Inc. for general corporate purposes. As with
the previous agreement, 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 the luxury brand
segment.

The new credit agreement contains affirmative and negative non-financial
and financial covenants, which apply to the luxury brand 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 new 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 luxury brand segment’s
assets, liabilities, consolidated financial position or consolidated
results of operations constitutes default under the agreement.

The luxury brand 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.

Loans under the new 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 2.50% to 3.25% 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 1.50% to 2.25% above the bank’s prime rate based upon a
pricing grid determined by the fixed charge coverage ratio as well.

Also included in long-term debt of Harry Winston Inc. is a 25-year loan
agreement for CHF 17.5 million ($17.7 million) used to finance the
construction of the Company’s watch factory in Geneva, Switzerland. The
loan agreement is comprised of a CHF 3.5 million ($3.5 million) loan
and a CHF 14.0 million ($14.2 million) loan. The CHF 3.5 million loan
bears interest at a rate of 3.15% and matures on April 22, 2013. The
CHF 14.0 million loan bears interest at a rate of 3.55% and matures on
January 31, 2033. At July 31, 2012, an aggregate of $15.2 million was
outstanding. The bank has a secured interest in the factory building.

Harry Winston S.A. has a CHF 0.5 million ($0.5 million) finance lease
for machinery located at the watch factory in Geneva, Switzerland. The
finance lease has an interest rate of 1.97% and matures on April 1,
2017. At July 31, 2012, $0.4 million was outstanding.

Harry Winston Japan, K.K. maintains unsecured credit agreements with
three banks, amounting to 1,275 million ($16.3 million). Harry Winston
Japan, K.K. also maintains a secured credit agreement amounting to
575 million ($7.4 million). This facility is secured by inventory
owned by Harry Winston Japan, K.K. At July 31, 2012, $23.7 million was
outstanding.

The Company’s first mortgage on real property has scheduled principal
payments of approximately $0.2 million quarterly, may be prepaid at any
time, and matures on September 1, 2018. On July 31, 2012, $6.0 million
was outstanding on the mortgage payable.

(b) Interest on loans and borrowings is calculated at various fixed and
floating rates. Projected interest payments on the current debt
outstanding were based on interest rates in effect at July 31, 2012,
and have been included under interest-bearing loans and borrowings in
the table above. Interest payments for the next twelve months are
approximated to be $10.7 million.

(c) The Joint Venture, under environmental and other agreements, must
provide funding for the Environmental Monitoring Advisory Board. These
agreements also state that the Joint Venture must provide security
deposits for the performance by the Joint Venture of its reclamation
and abandonment obligations under all environmental laws and
regulations. The operator of the Joint Venture has fulfilled such
obligations for the security deposits by posting letters of credit of
which HWDLP’s share as at July 31, 2012 was $81.1 million based on its
40% ownership interest in the Diavik Diamond Mine. There can be no
assurance that the operator will continue its practice of posting
letters of credit in fulfillment of this obligation, in which event
HWDLP would be required to post its proportionate share of such
security directly, which would result in additional constraints on
liquidity. The requirement to post security for the reclamation and
abandonment obligations may be reduced to the extent of amounts spent
by the Joint Venture on those activities. The Joint Venture has also
signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and
cultural well-being of area Aboriginal bands. The actual cash outlay
for the Joint Venture’s obligations under these agreements is not
anticipated to occur until later in the life of the Diavik Diamond
Mine.

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

Non-IFRS Measure

In addition to discussing earnings measures in accordance with IFRS, the
MD&A provides the following non-IFRS measure, which is also used by
management to monitor and evaluate the performance of the Company and
its business segments.

The term EBITDA (earnings before interest, taxes, depreciation and
amortization) does not have a standardized meaning according to IFRS
and therefore may not be comparable to similar measures presented by
other issuers. The Company defines EBITDA as sales minus cost of sales
and selling, general and administrative expenses, meaning it represents
operating profit before depreciation and amortization.

EBITDA is a measure commonly reported and widely used by investors and
analysts as an indicator of the Company’s operating performance and
ability to incur and service debt and as a valuation metric. EBITDA
margin is defined as the ratio obtained by dividing EBITDA by sales.

CONSOLIDATED


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

                                                                                                                   Six        Six
                                                                                                                months     months
                                                                                                                 ended      ended
                                                                                                                  July       July
                         2013       2013       2012        2012       2012       2012       2011       2011        31,        31,

                           Q2         Q1         Q4          Q3         Q2         Q1         Q4         Q3       2012       2011

    Operating        $          $          $          $           $          $          $          $          $          $
    profit
    (loss)             16,384     18,658     30,710     (1,963)     23,100      4,685     21,245     14,830     35,042     27,785

    Depreciation
    and
    amortization       16,980     25,546     27,512      23,121     20,716     20,291     24,635     18,657     42,527     41,007

    EBITDA           $ 33,364   $ 44,204   $ 58,222   $  21,158   $ 43,816   $ 24,976   $ 45,880   $ 33,487   $ 77,569   $ 68,792

MINING SEGMENT


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

                                                                                                                   Six        Six
                                                                                                                months     months
                                                                                                                 ended      ended
                                                                                                                  July       July
                         2013       2013       2012        2012       2012       2012       2011       2011        31,        31,

                           Q2         Q1         Q4          Q3         Q2         Q1         Q4         Q3       2012       2011

    Operating        $          $          $          $           $          $          $          $          $          $
    profit
    (loss)             11,723     16,385     27,388     (1,147)     18,506      3,962     17,858     12,638     28,108     22,468

    Depreciation
    and
    amortization       13,160     22,172     24,284      19,932     17,461     17,083     20,669     15,428     35,332     34,544

    EBITDA           $ 24,883   $ 38,557   $ 51,672   $  18,785   $ 35,967   $ 21,045   $ 38,527   $ 28,066   $ 63,440   $ 57,012

LUXURY BRAND SEGMENT


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

                                                                                                             Six        Six
                                                                                                          months     months
                                                                                                           ended      ended
                                                                                                            July       July
                         2013       2013      2012      2012       2012      2012      2011      2011        31,        31,

                           Q2         Q1        Q4        Q3         Q2        Q1        Q4        Q3       2012       2011

    Operating        $          $          $         $         $          $         $         $         $          $
    profit              8,019      7,106     6,832     1,464      6,926     4,223     5,277     5,552     15,125     11,149

    Depreciation
    and
    amortization        3,681      3,235     3,089     3,048      3,115     3,069     3,688     2,882      6,916      6,184

    EBITDA           $ 11,700   $ 10,341   $ 9,921   $ 4,512   $ 10,041   $ 7,292   $ 8,965   $ 8,434   $ 22,041   $ 17,333

CORPORATE SEGMENT


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

                                                                                                                           Six         Six
                                                                                                                        months      months
                                                                                                                         ended       ended
                                                                                                                          July        July
                          2013        2013        2012        2012        2012        2012        2011        2011         31,         31,

                            Q2          Q1          Q4          Q3          Q2          Q1          Q4          Q3        2012        2011

    Operating        $ (3,358)   $ (4,833)   $ (3,510)   $ (2,280)   $ (2,332)   $ (3,500) $   (1,890)   $ (3,360)   $ (8,191)   $ (5,832)
    loss

    Depreciation
    and
    amortization           139         139         139         141         140         139         278         347         279         279

    EBITDA           $ (3,219)   $ (4,694)   $ (3,371)   $ (2,139)   $ (2,192)   $ (3,361) $   (1,612)   $ (3,013)   $ (7,912)   $ (5,553)

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 MD&A and the Company’s other publicly
filed disclosure documents, readers should give careful consideration
to the following risks, each of which could have a material adverse
effect on the Company’s business prospects or financial condition.

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

The Diavik Diamond Mine, because of its remote northern location and
access only by winter road or by air, is subject to special climate and
transportation risks. These risks include the inability to operate or
to operate efficiently during periods of extreme cold, the
unavailability of materials and equipment, and increased transportation
costs due to the late opening and/or early closure of the winter road.
Such factors can add to the cost of mine development, production and
operation and/or impair production and mining activities, thereby
affecting the Company’s profitability.

Nature of Interest in DDMI
HWDLP holds an undivided 40% interest in the assets, liabilities and
expenses of the Diavik Diamond Mine and the Diavik group of mineral
claims. The Diavik Diamond Mine and the exploration and development of
the Diavik group of mineral claims is a joint arrangement between DDMI
(60%) and HWDLP (40%), and is subject to the risks normally associated
with the conduct of joint ventures and similar joint arrangements.
These risks include the inability to exert influence over strategic
decisions made in respect of the Diavik Diamond Mine and the Diavik
group of mineral claims, including the inability to control the timing
and scope of capital expenditures, risks that DDMI may decide not to
proceed with the mining the A-21 pipe or may otherwise change the mine
plan. By virtue of DDMI’s 60% interest in the Diavik Diamond Mine, it
has a controlling vote in virtually all Joint Venture management
decisions respecting the development and operation of the Diavik
Diamond Mine and the development of the Diavik group of mineral claims.
Accordingly, DDMI is able to determine the timing and scope of future
project capital expenditures, and therefore is able to impose capital
expenditure requirements on HWDLP that the Company may not have
sufficient cash to meet. A failure to meet capital expenditure
requirements imposed by DDMI could result in HWDLP’s interest in the
Diavik Diamond Mine and the Diavik group of mineral claims being
diluted. Rio Tinto plc, the parent of DDMI has recently announced a
review of its diamond operations.

Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the
Diavik Diamond Mine and on the results of the operations of its luxury
brand 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, renewed or additional credit market disruptions,
natural disasters or the occurrence of terrorist attacks or similar
activities creating disruptions in economic growth could result in
decreased demand for luxury goods such as diamonds and jewelry, thereby
negatively affecting the price of diamonds and jewelry. Similarly, a
substantial increase in the worldwide level of diamond production or
the release of stocks held back during recent periods of low demand
could also negatively affect the price of diamonds. In each case, such
developments could have a material adverse effect on the Company’s
results of operations.

Cash Flow and Liquidity
The Company’s liquidity requirements fluctuate from quarter to quarter
and year to year depending on, among other factors, the seasonality of
production at the Diavik Diamond Mine, the seasonality of mine
operating expenses, exploration expenses, capital expenditure programs,
the number of rough diamond sales events conducted during the quarter
and the volume, size and quality distribution of rough diamonds
delivered from the Diavik Diamond Mine and sold by the Company in each
quarter, along with the seasonality of sales and salon refurbishment
and expansion in the luxury brand segment. The Company’s principal
working capital needs include investments in inventory, prepaid
expenses and other current assets, and accounts payable and income
taxes payable. There can be no assurance that the Company will be able
to meet each or all of its liquidity requirements. A failure by the
Company to meet its liquidity requirements could result in the Company
failing to meet its planned development objectives, or in the Company
being in default of a contractual obligation, each of which could have
a material adverse effect on the Company’s business prospects or
financial condition.

Economic Environment
The Company’s financial results are tied to the global economic
conditions and their impact on levels of consumer confidence and
consumer spending. The global markets have experienced the impact of a
significant US and international economic downturn since the fall of
2008. This has restricted the Company’s growth opportunities both
domestically and internationally, and a return to a recession or weak
recovery, due to recent disruptions in financial markets in the US, the
Eurozone or elsewhere, and political upheavals in the Middle East,
could cause the Company to experience revenue declines across both of
its business segments due to deteriorated consumer confidence and
spending, and a decrease in the availability of credit, which could
have a material adverse effect on the Company’s business prospects or
financial condition. The credit facilities essential to the diamond
polishing industry are largely underwritten by European banks that are
currently under stress with the European sovereign debt issue. The
withdrawal or reduction of such facilities could also have a material
adverse effect on the Company’s business prospects or financial
condition. The Company monitors economic developments in the markets in
which it operates and uses this information in its continuous strategic
and operational planning in an effort to adjust its business in
response to changing economic conditions.

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

Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik
property requires licences and permits from the Canadian government.
The Diavik Diamond Mine Type “A” Water Licence was renewed by the
regional Wek’eezhii Land and Water Board to October 31, 2015. While the
Company anticipates that DDMI, the operator of the Diavik Diamond Mine,
will be able to renew this licence 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 licences and permits that may be
required to maintain the operation of the Diavik Diamond Mine or to
further explore and develop the Diavik property.

Regulatory and Environmental Risks
The operation of the Diavik Diamond Mine, exploration activities at the
Diavik property and the manufacturing of jewelry and watches are
subject to various laws and regulations governing the protection of the
environment, exploration, development, production, taxes, labour
standards, occupational health, waste disposal, mine safety,
manufacturing safety and other matters. New laws and regulations,
amendments to existing laws and regulations, or more stringent
implementation or changes in enforcement policies under existing laws
and regulations could have a material adverse effect on the Company by
increasing costs and/or causing a reduction in levels of production
from the Diavik Diamond Mine and in the manufacture of jewelry and
watches. As well, as the Company’s international operations expand, it
or its subsidiaries become subject to laws and regulatory regimes that
could 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
The Canadian government has established a number of policy measures in
response to concerns relating to climate change. While the impact of
these measures cannot be quantified at this time, the likely effect
will be to increase costs for fossil fuels, electricity and
transportation; restrict industrial emission levels; impose added costs
for emissions in excess of permitted levels; and increase costs for
monitoring and reporting. Compliance with these initiatives could have
a material adverse effect on the Company’s results of operations.

Resource and Reserve Estimates
The Company’s figures for mineral resources and ore reserves on the
Diavik group of mineral claims are estimates, and no assurance can be
given that the anticipated carats will be recovered. The estimation of
reserves is a subjective process. Forecasts are based on engineering
data, projected future rates of production and the timing of future
expenditures, all of which are subject to numerous uncertainties and
various interpretations. The Company expects that its estimates of
reserves will change to reflect updated information as well as to
reflect depletion due to production. Reserve estimates may be revised
upward or downward based on the results of current and future drilling,
testing or production levels, and on changes in mine design. In
addition, market fluctuations in the price of diamonds or increases in
the costs to recover diamonds from the Diavik Diamond Mine may render
the mining of ore reserves uneconomical.

Mineral resources that are not mineral reserves do not have demonstrated
economic viability. Due to the uncertainty that may attach to inferred
mineral resources, there is no assurance that mineral resources at the
Diavik property will be upgraded to proven and probable ore reserves.

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

Fuel Costs
The Diavik Diamond Mine’s expected fuel needs are purchased periodically
during the year for storage, and transported to the mine site by way of
the winter road. These costs will increase if transportation by air
freight is required due to a shortened “winter road season” or
unexpected high fuel usage.

The cost of the fuel purchased is based on the then prevailing price and
expensed into operating costs on a usage basis. The Diavik Diamond Mine
currently has no hedges for its future anticipated fuel consumption.

Reliance on Skilled Employees
Production at the Diavik Diamond Mine is dependent upon the efforts of
certain skilled employees of DDMI. The loss of these employees or the
inability of DDMI to attract and retain additional skilled employees
may adversely affect the level of diamond production from the
Diavik Diamond Mine.

The Company’s success in marketing rough diamonds and 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 operating its luxury brand
segment.

Expansion and Refurbishment of the Existing Salon Network
A key component of the Company’s luxury brand strategy in recent years
has been the expansion of its salon network. The Company currently
expects to expand its retail salon network to a total of 35 salons and
300 wholesale doors worldwide by fiscal 2016. An additional objective
of the Company in the luxury brand segment is to achieve a compound
annual growth rate in sales in the mid-teens and an operating profit in
the low to mid-teens, in each case by fiscal 2016. Although the Company
considers these objectives to be reasonable, they are subject to a
number of risks and uncertainties, and there can be no assurance that
these objectives will be realized. 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 by Harry Winston Inc. through
borrowings. The successful expansion of the Company’s global salon
network, and achieving an increase in sales and in operating profit,
will depend on a variety of factors, including worldwide economic
conditions, market demand for luxury goods, the strength of the Harry
Winston brand and the availability of sufficient funding. There can be
no assurance that the expansion of the salon network will continue or
that the current expansion will prove successful in increasing annual
sales or earnings from the luxury brand 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.

The Company has to date licensed five retail salons to operate under the
Harry Winston name and currently expects to increase the number of
licensed salons to 15 by fiscal 2016. There is no assurance that the
Company will be able to find qualified third parties to enter into
these licensing arrangements, or that the licensees will honour the
terms of the agreements. The conduct of licensees may have a negative
impact on the Company’s distinctive brand name and reputation.

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

Cybersecurity
The Company and certain of its third-party vendors receive and store
personal information in connection with human resources operations and
other aspects of the business. Despite the Company’s implementation of
security measures, its IT systems are vulnerable to damage from
computer viruses, natural disasters, unauthorized access, cyber attack
and other similar disruptions. Any system failure, accident or security
breach could result in disruptions to the Company’s operations. A
material network breach in the security of the IT systems could include
the theft of intellectual property or trade secrets. To the extent that
any disruption or security breach results in a loss or damage to the
Company’s data, or in inappropriate disclosure of confidential
information, financial data, or credit cardholder data, it could cause
significant damage to the Company’s reputation, affect relationships
with our customers, lead to claims against the Company and ultimately
harm its business. In addition, the Company may be required to incur
significant costs to protect against damage caused by these disruptions
or security breaches in the future. Although the Company believes that
it has robust information security procedures and other safeguards in
place, as cyber threats continue to evolve, the Company may be required
to expend additional resources to continue to enhance its information
security measures and/or to investigate and remediate any information
security vulnerabilities.

Intellectual Property
The success of the luxury brand segment depends on the value and
reputation of the Harry Winston brand and other proprietary property.
The Company relies on various intellectual property rights, including
copyrights, trademarks and trade secrets, to establish its proprietary
rights. While the Company devotes considerable efforts and resources to
protecting its intellectual property, if these efforts are not
successful the value of the brand may be harmed, which could have a
material adverse effect on the Company’s financial position.

Changes in Disclosure Controls and Procedures and Internal Control over
Financial Reporting

During the second quarter of fiscal 2013, there were no changes in the
Company’s disclosure controls and procedures or internal control over
financial reporting that materially affected, or are reasonably likely
to materially affect, the Company’s disclosure controls and procedures
or internal control over financial reporting.

Critical Accounting Estimates

Management is often required to make judgments, assumptions and
estimates in the application of IFRS 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 critical accounting estimates applied in the preparation of the
Company’s unaudited interim condensed consolidated financial statements
are consistent with those applied and disclosed in the Company’s MD&A
for the year ended January 31, 2012.

Changes in Accounting Policies

The International Accounting Standards Board (“IASB”) has issued a new
standard, IFRS 9, “Financial Instruments” (“IFRS 9″), which will
ultimately replace IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39″). IFRS 9 provides guidance on the classification
and measurement of financial assets and financial liabilities. This
standard becomes effective for the Company’s fiscal year end beginning
February 1, 2015. The Company is currently assessing the impact of the
new standard on its financial statements.

IFRS 10, “Consolidated Financial Statements” (“IFRS 10″), was issued by
the IASB on May 12, 2011, and will replace the consolidation
requirements in SIC-12, “Consolidation – Special Purpose Entities” and
IAS 27, “Consolidated and Separate Financial Statements”. The new
standard establishes control as the basis for determining which
entities are consolidated in the consolidated financial statements and
provides guidance to assist in the determination of control where it is
difficult to assess. IFRS 10 is effective for the Company’s fiscal year
end beginning February 1, 2013, with early adoption permitted. The
Company is currently assessing the impact of IFRS 10 on its
consolidated financial statements.

IFRS 11, “Joint Arrangements” (“IFRS 11″), was issued by the IASB on May
12, 2011 and will replace IAS 31, “Interest in Joint Ventures”. The new
standard will apply to the accounting for interests in joint
arrangements where there is joint control. Under IFRS 11, joint
arrangements are classified as either joint ventures or joint
operations. The structure of the joint arrangement will no longer be
the most significant factor in determining whether a joint arrangement
is either a joint venture or a joint operation. Proportionate
consolidations will no longer be allowed and will be replaced by equity
accounting. IFRS 11 is effective for the Company’s fiscal year-end
beginning February 1, 2013, with early adoption permitted. The Company
is currently assessing the impact of IFRS 11 on its results of
operations and financial position.

IFRS 13, “Fair Value Measurement” (“IFRS 13″), was also issued by the
IASB on May 12, 2011. The new standard makes IFRS consistent with
generally accepted accounting principles in the United States (“US
GAAP”) on measuring fair value and related fair value disclosures. The
new standard creates a single source of guidance for fair value
measurements. IFRS 13 is effective for the Company’s fiscal year end
beginning February 1, 2013, with early adoption permitted. The Company
is assessing the impact of IFRS 13 on its consolidated financial
statements.

Amendments to IAS 19, “Employee Benefits” (“IAS 19″), was issued by the
IASB on June 11, 2011. The amended standard eliminates the option to
defer the recognition of actuarial gains and losses through the
“corridor” approach, revises the presentation of changes in assets and
liabilities arising from defined benefit plans and enhances the
disclosures for defined benefit plans. IAS 19 is effective for the
Company’s fiscal year end beginning February 1, 2013, with early
adoption permitted. The Company is assessing the impact of IAS 19 on
its consolidated financial statements.

Outstanding Share Information


    As at August 31,
    2012

    Authorized                                                   Unlimited

    Issued and                                                  84,874,781
    outstanding shares

    Options outstanding                                          2,319,727

    Fully diluted                                               87,194,508

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.


                               Condensed Consolidated Balance Sheets

                   (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)

                                                              January         January
                                                                  31,             31,
                                                                 2012            2011
                                             July 31,       (Recast -       (Recast -
                                                 2012        note 10)        note 10)

    ASSETS                                                                           

    Current assets                                                                   

         Cash and cash        $            74,589     $    78,116     $   108,693
             equivalents
             (note 3)

         Accounts                          29,031          26,910          22,788
             receivable

         Inventory and                    486,129         457,827         403,212
             supplies (note
             4)

         Other current                     42,309          45,494          41,317
             assets

                                              632,058         608,347         576,010

    Property, plant and                       730,077         734,146         764,093
    equipment - Mining

    Property, plant and                        67,106          69,781          61,019
    equipment - Luxury brand

    Intangible assets, net                    127,058         127,337         127,894

    Other non-current assets                   13,916          14,165          14,521

    Deferred income tax                        89,338          82,955          65,833
    assets

    Total assets                  $         1,659,553     $ 1,636,731     $ 1,609,370

    LIABILITIES AND EQUITY                                                           

    Current liabilities                                                              

         Trade and other      $           119,981     $   104,681     $   139,551
             payables

         Employee benefit                   7,025           6,026           4,317
             plans

         Income taxes                      27,422          29,450           6,660
             payable

             Promissory note                        -               -          70,000

             Current portion                  235,743          29,238          24,215
             of
             interest-bearing
             loans and
             borrowings (note
             6)

                                              390,171         169,395         244,743

    Interest-bearing loans                     69,156         270,485         235,516
    and borrowings (note 6)

    Deferred income tax                       320,922         325,035         309,868
    liabilities

    Employee benefit plans                      9,391           9,463           7,287

    Provisions                                 61,557          65,245          50,130

    Total liabilities                         851,197         839,623         847,544

    Equity                                                                           

         Share capital                    507,975         507,975         502,129

         Contributed                       18,618          17,764          16,233
             surplus

         Retained                         277,393         261,028         235,574
             earnings

         Accumulated                        4,117          10,086           7,624
             other
             comprehensive
             income

         Total                            808,103         796,853         761,560
             shareholders'
             equity

         Non-controlling                      253             255             266
             interest

    Total equity                              808,356         797,108         761,826

    Total liabilities and         $         1,659,553     $ 1,636,731     $ 1,609,370
    equity

    Subsequent events (note
    6)

    The accompanying notes are an integral part of these unaudited interim condensed
    consolidated financial statements.

                            Condensed Consolidated Income Statements

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

                                     Three            Three              Six              Six
                                    months           months           months           months
                                     ended            ended            ended            ended
                                  July 31,         July 31,         July 31,         July 31,

                                      2012             2011             2012             2011

    Sales                     $    176,897     $    222,378     $    369,358     $    366,310

    Cost of sales                  104,694          150,177          223,828          246,629

    Gross margin                    72,203           72,201          145,530          119,681

    Selling,                        55,819           49,101          110,488           91,896
    general and
    administrative
    expenses

    Operating                       16,384           23,100           35,042           27,785
    profit

    Finance                        (4,028)          (5,183)          (7,908)          (9,166)
    expenses

    Exploration                      (568)            (781)            (822)            (993)
    costs

    Finance and                         90               83              155              341
    other income

    Foreign                            153              288            (211)              111
    exchange gain
    (loss)

    Profit before                   12,031           17,507           26,256           18,078
    income taxes

    Net income tax                   7,278            7,519            9,893            4,492
    expense

    Net profit                $      4,753     $      9,988     $     16,363     $     13,586

    Attributable to           $      4,755     $      9,986     $     16,365     $     13,582
    shareholders

    Attributable to           $        (2)     $          2     $        (2)     $          4
    non-controlling
    interest

    Earnings per
    share

        Basic             $       0.06     $       0.12     $       0.19     $       0.16

        Diluted           $       0.06     $       0.12     $       0.19     $       0.16

    Weighted                    84,874,781       84,688,002       84,874,781       84,491,901
    average number
    of shares
    outstanding

    The accompanying notes are an integral part of these unaudited interim condensed
    consolidated financial statements.

             Condensed Consolidated Statements of Comprehensive Income

           (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)

                            Three        Three           Six            Six
                           months       months        months         months
                            ended        ended         ended          ended
                             July         July          July       July 31,
                              31,          31,           31,

                             2012         2011          2012           2011

    Net profit          $   4,753     $  9,988     $  16,363     $   13,586

    Other
    comprehensive
    income

       Net gain       (6,106)        8,531       (5,969)         15,777
    (loss) on
    translation of
    net foreign
    operations (net
    of tax of nil)

    Other                 (6,106)        8,531       (5,969)         15,777
    comprehensive
    income, net of
    tax

    Total               $ (1,353)     $ 18,519     $  10,394     $   29,363
    comprehensive
    income

    Attributable to     $ (1,351)     $ 18,517     $  10,396     $   29,359
    shareholders

    Attributable to     $     (2)     $      2     $     (2)     $        4
    non-controlling
    interest

    The accompanying notes are an integral part of these unaudited interim
    condensed consolidated financial statements.

              Condensed Consolidated Statements of Changes in Equity

           (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)

                                                     Six                Six
                                            months ended       months ended
                                                July 31,           July 31,

                                                    2012               2011

    Common shares:                                                         

    Balance at beginning of               $      507,975     $      502,129
    period

    Issued during the period                           -              4,981

    Transfer from contributed                          -              2,300
    surplus on exercise of
    options

    Balance at end of period                     507,975            509,410

    Contributed surplus:                                                   

    Balance at beginning of                       17,764             16,233
    period

    Stock-based compensation                         854              1,110
    expense

    Transfer from contributed                          -            (2,300)
    surplus on exercise of
    options

    Balance at end of period                      18,618             15,043

    Retained earnings:                                                     

    Balance at beginning of                      261,028            235,574
    period (Recast - note 10)

    Net profit attributable to                    16,365             13,582
    common shareholders

    Balance at end of period                     277,393            249,156

    Accumulated other
    comprehensive income:

    Balance at beginning of                       10,086              7,624
    period

    Other comprehensive income                                             

        Net gain (loss) on                   (5,969)             15,777
            translation of net
            foreign operations
            (net of tax of nil)

    Balance at end of period                       4,117             23,401

    Non-controlling interest:                                              

    Balance at beginning of                          255                266
    period

    Non-controlling interest                         (2)                  4

    Balance at end of period                         253                270

    Total equity                          $      808,356     $      797,280

    The accompanying notes are an integral part of these unaudited interim
    condensed consolidated financial statements.

                           Condensed Consolidated Statements of Cash Flows

                    (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) (UNAUDITED)

                                    Three          Three             Six            Six
                                   months         months          months         months
                                    ended          ended           ended          ended
                                 July 31,       July 31,        July 31,       July 31,

                                     2012           2011            2012           2011

    Cash provided by
    (used in)                                                                          

    Operating                                                                          

    Net profit                 $    4,753     $    9,988     $    16,363     $   13,586

        Depreciation
            and
            amortization           16,980         20,716          42,527         41,007

        Deferred
            income tax
            recovery              (1,068)          (771)         (5,541)        (3,419)

        Current
            income tax
            expense                 8,346          8,290          15,434          7,911

        Finance
            expenses                4,028          5,183           7,908          9,166

        Stock-based
            compensation              448            513             854          1,110

            Other
            non-cash
            items                 (2,400)              -         (2,518)              -

        Foreign
            exchange
            loss (gain)             (415)          (725)             417          (192)

        Loss (gain)
            on
            disposition
            of assets                  22              -           (308)              -

    Change in non-cash
    operating working
    capital, excluding
    taxes and finance
    expenses                     (10,462)       (16,302)        (16,578)       (57,516)

    Cash provided from
    operating activities           20,232         26,892          58,558         11,653

            Interest
            paid                  (3,201)        (3,689)         (6,014)        (5,197)

        Income and
            mining taxes
            paid                  (8,471)         13,165        (19,038)         10,454

    Net cash from
    operating activities            8,560         36,368          33,506         16,910

    FINANCING                                                                          

    Decrease in
    interest-bearing
    loans and borrowings            (185)          (180)           (370)          (354)

    Increase in
    revolving credit               24,998         67,719         106,182         85,604

    Decrease in
    revolving credit             (48,909)       (57,690)       (101,185)       (58,007)

    Issue of common
    shares, net of issue
    costs                               -          1,063               -          4,981

    Cash provided from
    financing activities         (24,096)         10,912           4,627         32,224

    Investing                                                                          

    Property, plant and
    equipment - Mining           (15,788)       (12,649)        (33,937)       (25,084)

    Property, plant and
    equipment - Luxury
    brand                         (1,981)        (1,900)         (6,423)        (3,289)

    Net proceeds from
    sale of property,
    plant and equipment                 -              -           2,619              -

    Other non-current
    assets                          (186)          (427)           (633)          (823)

    Cash used in
    investing activities         (17,955)       (14,976)        (38,374)       (29,196)

    Foreign exchange
    effect on cash
    balances                      (4,738)          6,363         (3,286)         11,250

    Increase (decrease)
    in cash and cash
    equivalents                  (38,229)         38,667         (3,527)         31,188

    Cash and cash
    equivalents,
    beginning of period           112,818        101,214          78,116        108,693

    Cash and cash              $              $              $               $
    equivalents, end of
    period                         74,589        139,881          74,589        139,881

    Change in non-cash
    operating working
    capital, excluding
    taxes and finance
    expenses                                                              

    Accounts receivable           (3,032)        (2,845)         (2,106)        (8,226)

    Inventory and
    supplies                        4,371         37,959        (32,587)       (24,436)

    Other current assets            6,290          3,173           3,179          2,617

    Trade and other
    payables                     (17,092)       (54,726)          13,927       (27,172)

    Employee benefit
    plans                           (999)            137           1,009          (299)

                               $ (10,462)     $ (16,302)     $  (16,578)     $ (57,516)

    The accompanying notes are an integral part of these unaudited interim condensed
    consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

JULY 31, 2012 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS
OTHERWISE NOTED)

Note 1:
Nature of Operations

Harry Winston Diamond Corporation (the “Company”) is a diamond
enterprise with assets in the mining and luxury brand segments of the
diamond industry.

The Company’s mining asset is an ownership interest in the Diavik group
of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an
unincorporated joint arrangement between Diavik Diamond Mines Inc.
(“DDMI”) (60%) and Harry Winston Diamond Limited Partnership (“HWDLP”)
(40%) where HWDLP holds an undivided 40% ownership interest in the
assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is
the operator of the Diavik Diamond Mine. DDMI and HWDLP are
headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary
of Rio Tinto plc of London, England, and Harry Winston Diamond Limited
Partnership is a wholly owned subsidiary of Harry Winston Diamond
Corporation of Toronto, Canada.

The Company also owns Harry Winston Inc., the premier fine jewelry and
watch retailer with select locations throughout the world. Its head
office is located in New York City, United States.

The Company’s operations fluctuate from quarter to quarter depending on,
among other factors, the seasonality of production at the Diavik
Diamond Mine, seasonality of mine operating expenses, capital
expenditure programs, the number of rough diamond sales events
conducted during the quarter and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine
in each quarter. The quarterly results for the luxury brand segment are
also seasonal, with generally higher sales during the fourth quarter
due to the holiday season.

The Company is incorporated and domiciled in Canada and its shares are
publicly traded on the Toronto Stock Exchange and the New York Stock
Exchange. The address of its registered office is Toronto, Ontario.

Note 2:
Basis of Preparation


    (a)  Statement of compliance

         These unaudited interim condensed consolidated financial
         statements have been prepared in accordance with International
         Financial Reporting Standards ("IFRS") International Accounting
         Standard ("IAS") 34, "Interim Financial Reporting".

         These unaudited interim condensed consolidated financial
         statements do not include all disclosures required by IFRS for
         annual consolidated financial statements and accordingly should be
         read in conjunction with the Company's audited consolidated
         financial statements and notes thereto for the year ended January
         31, 2012. These statements have been prepared following the same
         accounting policies and methods of computation as the consolidated
         financial statements for the year ended January 31, 2012.

    (b)  Basis of measurement

         These unaudited interim condensed consolidated financial
         statements have been prepared on the historical cost basis except
         for the following:

             --  financial instruments held for trading are measured at
                 fair value through profit and loss
             --  liabilities for Restricted Share Unit and Deferred Share
                 Unit plans are measured at fair value

    (c)  Currency of presentation

         These unaudited interim condensed consolidated financial
         statements are expressed in United States dollars, consistent with
         the predominant functional currency of the Company's operations.
         All financial information presented in United States dollars has
         been rounded to the nearest thousand.

Note 3:
Cash Resources


                                               July 31,       January 31,
                                                   2012              2012

    Cash on hand and                     $       69,303     $      76,030
    balances with
    banks

    Short-term
    investments (a)                               5,286             2,086

    Total cash                           $       74,589     $      78,116
    resources

    (a)  Short-term investments are held in overnight deposits and money
         market instruments with a maturity of 30 days.

Note 4:
Inventory and Supplies


                                                July 31,       January 31,
                                                    2012              2012

    Luxury brand raw                      $       65,131     $      62,188
    materials

    Mining rough diamond                          70,181            62,472
    inventory

                                                 135,312           124,660

    Luxury brand                                  51,333            45,407
    work-in-progress

    Luxury brand                                 227,987           218,844
    merchandise inventory

    Mining supplies                               71,497            68,916
    inventory

    Total inventory and                   $      486,129     $     457,827
    supplies

Total inventory and supplies is net of a provision for obsolescence of
$3.0 million ($3.1 million at January 31, 2012).

Note 5:
Diavik Joint Venture

The following represents HWDLP’s 40% proportionate interest in the Joint
Venture as at June 30, 2012 and December 31, 2011:


                                                July 31,       January 31,
                                                    2012              2012

    Current assets                        $      101,670     $     101,454

    Non-current assets                           679,507           685,590

    Current liabilities                           29,568            31,745

    Non-current liabilities                      751,609           755,298
    and participant's
    account

                          Three          Three            Six            Six
                         months         months         months         months
                          ended          ended          ended          ended
                       July 31,       July 31,       July 31,       July 31,
                           2012           2011           2012           2011

    Expenses
    net of
    interest
    income (a)
    (b)              $   58,585     $   62,775     $  115,323     $  123,658

    Cash flows         (55,022)       (46,872)       (97,375)       (89,896)
    resulting
    from (used
    in)
    operating
    activities

    Cash flows           50,668         61,101        112,200        115,084
    resulting
    from
    financing
    activities

    Cash flows          (3,958)       (10,044)       (19,141)       (22,221)
    resulting
    from (used
    in)
    investing
    activities

    (a)  The Joint Venture only earns interest income.

    (b)  Expenses net of interest income for the three months and six
         months ended July 31, 2012 of $nil and $0.1 million, respectively
         (three and six months ended July 31, 2011 of $nil and $0.1
         million, respectively).

HWDLP is contingently liable for DDMI’s portion of the liabilities of
the Joint Venture, and to the extent HWDLP’s participating interest has
increased because of the failure of DDMI to make a cash contribution
when required, HWDLP would have access to an increased portion of the
assets of the Joint Venture to settle these liabilities. Additional
information on commitments and contingencies related to the Diavik
Joint Venture is found in Note 7.

Note 6:
Interest-Bearing Loans and Borrowings


                                                 July 31,       January 31,
                                                     2012              2012

    Mining segment                        $        49,010     $      48,460
    credit facilities

    Harry Winston                                 219,199           217,071
    Inc. credit
    facilities

    First mortgage on                               5,971             6,342
    real property

    Bank advances                                  30,285            27,850

    Finance leases                                    434                 -

    Total                                         304,899           299,723
    interest-bearing
    loans and
    borrowings

    Less current                                (235,743)          (29,238)
    portion

                                          $        69,156     $     270,485

                                                                              Face
                                                              Carrying       value
                                                                amount          at
                                    Nominal                         at        July
                                   interest       Date of     July 31,         31,
                    Currency           rate      maturity         2012        2012          Borrower

    Secured               US          3.74%     March 31,       $204.0      $204.0     Harry Winston
    bank loan                                        2013      million     million              Inc.

    Secured              CHF          3.15%     April 22,         $3.5        $3.5     Harry Winston
    bank loan                                        2013      million     million              S.A.

    Secured              CHF          3.55%       January        $11.7       $11.7     Harry Winston
    bank loan                                    31, 2033      million     million              S.A.

    Secured               US          3.96%      June 24,        $49.0       $50.0     Harry Winston
    bank loan                                        2013      million     million           Diamond
                                                                                         Corporation
                                                                                                 and
                                                                                       Harry Winston
                                                                                       Diamond Mines
                                                                                                Ltd.

    First                CDN          7.98%     September         $6.0        $6.0           6019838
    mortgage                                      1, 2018      million     million       Canada Inc.
    on real
    property

    Secured               US          4.80%        Due on         $6.6        $6.6     Harry Winston
    bank                                           demand      million     million           Diamond
    advance                                                                            International
                                                                                                N.V.
                                                                                       Harry Winston
                                                                                            Diamond
                                                                                             (India)
                                                                                             Private
                                                                                             Limited

    Secured              YEN          2.55%        August         $7.4        $7.4     Harry Winston
    bank                                         22, 2012      million     million       Japan, K.K.
    advance

    Unsecured            YEN          2.98%        August         $6.6        $6.6     Harry Winston
    bank                                         31, 2012      million     million       Japan, K.K.
    advance

    Unsecured            YEN          2.98%        August         $7.2        $7.2     Harry Winston
    bank                                         31, 2012      million     million       Japan, K.K.
    advance

    Unsecured            YEN          2.00%       October         $1.3        $1.3     Harry Winston
    bank                                         31, 2012      million     million       Japan, K.K.
    advance

    Unsecured            YEN          1.88%      November         $1.3        $1.3     Harry Winston
    bank                                         22, 2012      million     million       Japan, K.K.
    advance

    Finance              CHF          1.97%      April 1,         $0.4        $0.4     Harry Winston
    lease                                            2017      million     million              S.A.

On August 30, 2012, the Company’s luxury brand subsidiary, Harry Winston
Inc., refinanced its senior secured revolving credit facility by
entering into a new secured five-year credit agreement with a
consortium of banks led by Standard Chartered Bank establishing a $260
million facility for revolving credit loans. The facility has a
maturity date of August 30, 2017.

Note 7:
Commitments and Guarantees


    (a)  Environmental agreements

         Through negotiations of environmental and other agreements, the
         Joint Venture must provide funding for the Environmental
         Monitoring Advisory Board. HWDLP anticipates its share of this
         funding requirement will be approximately $0.3 million for
         calendar 2012. Further funding will be required in future years;
         however, specific amounts have not yet been determined. These
         agreements also state that the Joint Venture must provide security
         deposits for the performance by the Joint Venture of its
         reclamation and abandonment obligations under all environmental
         laws and regulations. HWDLP's share of the letters of credit
         outstanding posted by the operator of the Joint Venture with
         respect to the environmental agreements as at July 31, 2012, was
         $81.1 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 upon for
         successive periods of six years thereafter until termination. The
         agreements terminate in the event that the mine permanently ceases
         to operate. Harry Winston Diamond Corporation's share of the Joint
         Venture's participation agreements as at July 31, 2012 was $1.5
         million.

    (c)  Operating lease commitments

         The Company has entered into non-cancellable operating leases for
         the rental of luxury brand salons and office premises, which
         expire at various dates through 2029. The leases have varying
         terms, escalation clauses and renewal rights. Any renewal terms
         are at the option of the lessee at lease payments based on market
         prices at the time of renewal. Certain leases contain either
         restrictions relating to opening additional salons within a
         specified radius or contain additional rents related to sales
         levels. Minimum rent payments under operating leases are
         recognized on a straight-line basis over the term of the lease,
         including any periods of free rent. Future minimum lease payments
         under non-cancellable operating leases as at July 31, 2012 are as
         follows:

          Within one year                                   $    26,581

          After one year but not more than five years           102,092

          More than five years                                  132,774

                                                            $   261,447

    (d)  Capital commitments related to the Joint Venture

         At July 31, 2012, Harry Winston Diamond Corporation's share of
         approved capital expenditures at the Joint Venture was $23.4
         million. At July 31, 2012, Harry Winston Diamond Corporation's
         current projected share of the planned capital expenditures at the
         Diavik Diamond Mine for the calendar years 2012 to 2016 is
         approximately $140 million assuming a Canadian/US average exchange
         rate of $1.00 for the five years.

Note 8:
Capital Management

The Company’s capital includes cash and cash equivalents, current and
non-current interest-bearing loans and borrowings and equity, which
includes issued common shares, contributed surplus and retained
earnings.

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

The Company assesses liquidity and capital resources on a consolidated
basis. The Company’s requirements are for cash operating expenses,
working capital, contractual debt requirements and capital
expenditures. The Company believes that it will generate sufficient
liquidity to meet its anticipated requirements for the next twelve
months.

On August 30, 2012, the Company’s luxury brand subsidiary, Harry Winston
Inc., refinanced its secured revolving credit facility by entering into
a new secured five-year credit agreement with a consortium of banks led
by Standard Chartered Bank establishing a $260.0 million facility for
revolving credit loans. The new facility expires on August 30, 2017. As
with the previous agreement, 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 the luxury brand
segment.

Note 9:
Segmented Information

The Company operated in three segments within the diamond industry -
mining, luxury brand and corporate – for the three months ended July
31, 2012.

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

The luxury brand 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.

The corporate segment captures costs not specifically related to
operations of the mining or luxury brand segments.


    For the three months                   Mining        Luxury       Corporate           Total
    ended July 31, 2012                                   brand

    Sales                                                                                      

            America                   $     2,269 $      35,759     $         -     $    38,028

        Europe                         50,514        15,636               -          66,150

        Asia excluding                  8,690        33,956               -          42,646
            Japan

        Japan                               -        30,073               -          30,073

        Total sales                    61,473       115,424               -         176,897

    Cost of sales                                                                              

        Depreciation                   12,449           277               -          12,726
            and
            amortization

        All other costs                34,335        57,633               -          91,968

        Total cost of                  46,784        57,910               -         104,694
            sales

    Gross margin                           14,689        57,514               -          72,203

    Gross margin (%)                        23.9%         49.8%              -%           40.8%

    Selling, general and
    administrative expenses

        Selling and                       817        39,474               -          40,291
            related
            expenses

        Administrative                  2,149        10,021           3,358          15,528
            expenses

        Total selling,                  2,966        49,495           3,358          55,819
            general and
            administrative
            expenses

    Operating profit (loss)                11,723         8,019         (3,358)          16,384

    Finance expenses                      (2,151)       (1,877)               -         (4,028)

    Exploration costs                       (568)             -               -           (568)

    Finance and other                          67            23               -              90
    income

    Foreign exchange gain                   1,048         (895)               -             153
    (loss)

    Segmented profit (loss)           $    10,119 $       5,270     $   (3,358)     $    12,031
    before income taxes

    Segmented assets as at
    July 31, 2012

        Canada                    $   937,687 $           -     $         -     $   937,687

        United States                       -       367,751         115,797         483,548

        Other foreign                  22,682       215,636               -         238,318
            countries

                                      $   960,369 $     583,387     $   115,797     $ 1,659,553

    Capital expenditures              $    15,788 $       1,981     $         -     $    17,769

    Other significant
    non-cash items:

        Deferred income           $   (1,592) $         581     $      (57)     $   (1,068)
            tax
            recovery   

    For the three months                   Mining        Luxury       Corporate           Total
    ended July 31, 2011                                   brand

    Sales                                                                                      

        America                   $       447     $  27,183     $         -     $    27,630

        Europe                         80,131        26,098               -         106,229

            Asia excluding
        Japan (a)                       9,030        59,056               -          68,086

        Japan                               -        20,433               -          20,433

        Total sales                    89,608       132,770               -         222,378

    Cost of sales                                                                              

        Depreciation                   16,802            77               -          16,879
            and
            amortization

        All other costs                50,811        82,436              51         133,298

        Total cost of                  67,613        82,513              51         150,177
            sales

    Gross margin                           21,995        50,257            (51)          72,201

    Gross margin (%)                        24.5%         37.9%              -%           32.5%

    Selling, general and
    administrative expenses

        Selling and                       777        32,977               -          33,754
            related
            expenses

        Administrative                  2,712        10,354           2,281          15,347
            expenses

        Total selling,                  3,489        43,331           2,281          49,101
            general and
            administrative
            expenses

    Operating profit (loss)                18,506         6,926         (2,332)          23,100

    Finance expenses                      (3,787)       (1,396)               -         (5,183)

    Exploration costs                       (781)             -               -           (781)

    Finance and other                          78             5               -              83
    income

    Foreign exchange gain                     846         (558)               -             288
    (loss)

    Segmented profit (loss)           $    14,862     $   4,977     $   (2,332)     $    17,507
    before income taxes

    Segmented assets as at
    July 31, 2011

        Canada                    $   983,625     $       -     $         -     $   983,625

        United States                       -       320,333         106,388         426,721

        Other foreign                  33,536       221,457               -         254,993
            countries

                                      $ 1,017,161     $ 541,790     $   106,388     $ 1,665,339

    Capital expenditures              $    12,649     $   1,900     $         -     $    14,549

    Other significant
    non-cash items:

        Deferred income           $   (3,408)     $   2,714     $      (77)     $     (771)
            tax expense
            (recovery)

    (a)  Sales to one significant customer in the luxury brand segment
         totalled $45.0 million for the three months ended July 31, 2011.

    For the six months                     Mining        Luxury       Corporate           Total
    ended July 31, 2012                                   brand

    Sales                                                                                      

        America                   $     9,701     $  68,045     $         -     $    77,746

        Europe                        104,884        45,690               -         150,574

        Asia excluding                 35,897        54,341               -          90,238
            Japan

        Japan                               -        50,800               -          50,800

        Total sales                   150,482       218,876               -         369,358

    Cost of sales                                                                              

        Depreciation                   33,954           660               -          34,614
            and
            amortization

        All other costs                82,929       106,285               -         189,214

        Total cost of                 116,883       106,945               -         223,828
            sales

    Gross margin                           33,599       111,931               -         145,530

    Gross margin (%)                        22.3%         51.1%              -%           39.4%

    Selling, general and
    administrative expenses

        Selling and                     1,710        76,933               -          78,643
            related
            expenses

        Administrative                  3,781        19,873           8,191          31,845
            expenses

        Total selling,                  5,491        96,806           8,191         110,488
            general and
            administrative
            expenses

    Operating profit (loss)                28,108        15,125         (8,191)          35,042

    Finance expenses                      (4,393)       (3,515)               -         (7,908)

    Exploration costs                       (822)             -               -           (822)

    Finance and other                         119            36               -             155
    income

    Foreign exchange gain                     678         (889)               -           (211)
    (loss)

    Segmented profit (loss)           $    23,690     $  10,757     $   (8,191)     $    26,256
    before income taxes

    Segmented assets as at
    July 31, 2012

        Canada                    $   937,687     $       -     $         -     $   937,687

        United States                       -       367,751         115,797         483,548

        Other foreign                  22,682       215,636               -         238,318
            countries

                                      $   960,369     $ 583,387     $   115,797     $ 1,659,553

    Capital expenditures              $    33,937     $   6,423     $         -     $    40,360

    Other significant
    non-cash items:

        Deferred income           $   (4,159)     $ (1,268)     $     (114)     $   (5,541)
            tax
            recovery   

    For the six months                     Mining        Luxury       Corporate           Total
    ended July 31, 2011                                   brand

    Sales                                                                                      

        America                   $     3,456     $  62,670     $         -     $    66,126

        Europe                        130,883        43,544               -         174,427

            Asia excluding
        Japan (a)                      17,304        73,410               -          90,714

        Japan                               -        35,043               -          35,043

        Total sales                   151,643       214,667               -         366,310

    Cost of sales                                                                              

        Depreciation                   33,232           157               -          33,389
            and
            amortization

        All other costs                87,824       125,315             101         213,240

        Total cost of                 121,056       125,472             101         246,629
            sales

    Gross margin                           30,587        89,195           (101)         119,681

    Gross margin (%)                        20.2%         41.6%              -%           32.7%

    Selling, general and
    administrative expenses

        Selling and                     1,426        59,298               -          60,724
            related
            expenses

        Administrative                  6,693        18,748           5,731          31,172
            expenses

        Total selling,                  8,119        78,046           5,731          91,896
            general and
            administrative
            expenses

    Operating profit (loss)                22,468        11,149         (5,832)          27,785

    Finance expenses                      (6,480)       (2,686)               -         (9,166)

    Exploration costs                       (993)             -               -           (993)

    Finance and other                         155           186               -             341
    income

    Foreign exchange gain                   (131)           242               -             111
    (loss)

    Segmented profit (loss)           $    15,019     $   8,891     $   (5,832)     $    18,078
    before income taxes

    Segmented assets as at
    July 31, 2011

        Canada                    $   983,625     $       -     $         -     $   983,625

        United States                       -       320,333         106,388         426,721

        Other foreign                  33,536       221,457               -         254,993
            countries

                                      $ 1,017,161     $ 541,790     $   106,388     $ 1,665,339

    Capital expenditures              $    25,084     $   3,289     $         -     $    28,373

    Other significant
    non-cash items:

        Deferred income           $   (7,963)     $   4,699     $     (155)     $   (3,419)
            tax expense
            (recovery)

    (a)  Sales to one significant customer in the luxury brand segment
         totalled $45.0 million for the six months ended July 31, 2011.

Note 10:
Recast

During the preparation of the income tax provision for the quarter ended
April 30, 2012, the Company noted a historical difference related to
the accounting for Northwest Territories mining royalty taxes in
connection with the Company’s rough diamond inventory. For Northwest
Territories mining royalty tax purposes, the Company is subject to
mining royalty taxes, which includes a requirement to treat the rough
diamond inventory when it comes out of the Diavik Diamond Mine as
taxable. This results in an accounting timing difference between the
mining and extraction of the diamonds and when they are sold. The
Company did not previously record the corresponding deferred tax asset
on the rough diamond inventory related to royalty taxes payable. The
Company has revised the comparative figures to correct the immaterial
impact of this item with the offset recorded in retained earnings,
amounting to $5.8 million as at January 31, 2011.

SOURCE Harry Winston Diamond Corporation


Source: PR Newswire