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Harry Winston Diamond Corporation Announces Second Quarter Fiscal 2009 Results

September 9, 2008

TORONTO, Sept. 9 /PRNewswire-FirstCall/ — Harry Winston Diamond Corporation (TSX: HW; NYSE: HWD) today reported second quarter results for the period ending JulyÃӚ“šÃƒÆ’“šÃƒ“š 31, 2008. The Company recorded an increase in consolidated sales for the quarter of 7%, generating a 23% increase in gross margin and a 30% increase in consolidated earnings from operations compared to the results of the second quarter of the prior year. Consolidated quarterly sales totalled $186.1ÃӚ“šÃƒÆ’“šÃƒ“š million with earnings from operations of $73.4 million compared to $173.3 million and $56.2 million, respectively, for the comparable quarter of the prior year.

Net earnings were $49.9 million, or $0.81 per share, compared to net earnings of $20.1 million, or $0.34 per share, respectively, in the second quarter of the prior year. Net earnings for the comparable quarter of the prior year were reduced by a net $11.8 million foreign exchange loss, or $0.20ÃӚ“šÃƒÆ’“šÃƒ“š per share, as a result of the strengthening of the Canadian dollar relative to the US dollar, compared to a net $5.3 million foreign exchange gain in the current quarter, or $0.09 per share.

“The international cachet of the Harry Winston brand has proven its strength despite difficult trading conditions in both the US and Japanese markets. This expanded market place has also delivered strong pricing for our rough diamond sales in the face of lower than anticipated production from the Diavik Mine as we work through the transition from one open pit to the next and the uncertainty in production forecasting that this entails. The construction program to develop the underground portions of the ore bodies that add lifetime and operational security to the project is well advanced and comfortably within schedule and cost budgets,” said Robert A. Gannicott, Chairman and Chief Executive Officer.

Thomas J. O’Neill, President of Harry Winston Diamond Corporation added, “Our businesses in Asia, Europe and the Middle East have been sufficient to offset the general market softness in the US and Japan; this contributed to our strong retail finish for second quarter. Together with solid results from the first quarter, the first half of the year has put us on firm footing into the second half of the year.”

Earnings from operations for the mining segment increased 27% to $67.5ÃӚ“šÃƒÆ’“šÃƒ“š million compared to the comparable quarter of the prior year. Rough diamond production for the second calendar quarter was down 23% to 1.0 million carats produced versus 1.3 million for the comparable quarter of the prior year resulting from the continuing grade variation in the A-154 South pipe and the initial stripping of low grade A-418 ore mixed with waste overburden material. Mining sales of $105.0 million remained at a consistent level with the prior year as higher diamond prices compensated for reduced volume.

The retail segment recorded a 19% increase in sales to $81.1 million with earnings from operations of $5.9 million compared to earnings from operations of $3.2 million in the comparable quarter of the prior year. Retail segment SG&A as a percentage of sales decreased to 42% in the second quarter from 43% in the comparable quarter of the prior year.

   Second Quarter Fiscal 2009 Financial Highlights   (US$ in millions except Earnings per Share amounts)    -------------------------------------------------------------------------                                       Three     Three      Six       Six                                       months    months    months    months                                       ended     ended     ended     ended                                      Jul. 31,  Jul. 31,  Jul. 31,  Jul. 30,                                        2008      2007      2008      2007   -------------------------------------------------------------------------   Sales                                186.1     173.3     342.2     314.6   -------------------------------------------------------------------------   Earnings from operations              73.4      56.2     113.0      92.3   -------------------------------------------------------------------------   Net earnings                          49.9      20.1      71.2      23.3   -------------------------------------------------------------------------   Earnings per share                   $0.81     $0.34     $1.17     $0.40   -------------------------------------------------------------------------    Dividend Announcement   

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

Conference Call and Webcast

As previously announced, Harry Winston Diamond Corporation will host a conference call for analysts, investors and other interested parties on Wednesday, September 10, beginning at 10:00AM EDT. Listeners may access a live broadcast of the conference call on the company’s investor relations web site at http://investor.harrywinston.com/ or by dialing 866.713.8564 within North America or 617.597.5312 from international locations and entering passcode 73778735.

An online archive of the broadcast will be available by accessing the company’s investor relations web site at http://investor.harrywinston.com/. A telephone replay of the call will be available one hour after the call through 11:00PM (EDT), Wednesday, September 24, 2008, by dialing 888.286.8010 within North America or 617.801.6888 from international locations and entering passcode 16919976.

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

About Harry Winston Diamond Corporation

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

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

The Company recorded an increase in consolidated sales for the quarter of 7%, generating a 23% increase in gross margin and a 30% increase in consolidated earnings from operations compared to the results of the second quarter of the prior year. Consolidated quarterly sales totalled $186.1ӚÓš million with earnings from operations of $73.4 million compared to $173.3 million and $56.2 million, respectively, for the comparable quarter of the prior year.

Net earnings were $49.9 million, or $0.81 per share, compared to net earnings of $20.1 million, or $0.34 per share, respectively, in the second quarter of the prior year. Net earnings for the comparable quarter of the prior year were reduced by a net $11.8 million foreign exchange loss, or $0.20ӚÓš per share, as a result of the strengthening of the Canadian dollar relative to the US dollar, compared to a net $5.3 million foreign exchange gain in the current quarter, or $0.09 per share.

Earnings from operations for the mining segment increased 27% to $67.5ӚÓš million compared to the comparable quarter of the prior year. Rough diamond production for the second calendar quarter was down 23% to 1.0 million carats produced versus 1.3 million for the comparable quarter of the prior year resulting from the continuing grade variation in the A-154 South pipe and the initial stripping of low grade A-418 ore mixed with waste overburden material. Mining sales of $105.0 million remained at a consistent level with the prior year as higher diamond prices compensated for reduced volume.

The retail segment recorded a 19% increase in sales to $81.1 million, with earnings from operations of $5.9 million compared to earnings from operations of $3.2 million in the comparable quarter of the prior year. Retail segment SG&A as a percentage of sales decreased to 42% in the second quarter from 43% in the comparable quarter of the prior year.

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

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

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

Caution Regarding Forward-Looking Information

Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, new salon openings, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, expected diamond prices and expectations concerning the diamond industry, expected cost of sales and gross margin trends in the mining segment, and expected sales trends in the retail segment. Actual results may vary. See “Risks and Uncertainties” on page 18.

Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, credit market conditions and the ability of the Company to refinance its existing credit facilities, the level of worldwide diamond production and world and US economic conditions. Specifically, in estimating Harry Winston Diamond Corporation’s projected share of the Diavik Diamond Mine capital expenditure requirements over the next two years, Harry Winston Diamond Corporation has used an average Canadian/US dollar exchange rate of $0.99, and has assumed that construction will continue on schedule and without undue disruption with respect to current underground mining construction initiatives. In making statements regarding estimated production at the Diavik Diamond Mine and future mining activity and mine plans, including plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, and future rough diamond sales, Harry Winston Diamond Corporation has assumed, among other things, that mining operations and construction and exploration activities will proceed in the ordinary course according to schedule and consistent with past results. In making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends in the retail segment, the Company has made assumptions regarding, among other things, world and US economic conditions. While Harry Winston Diamond Corporation considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See “Risks and Uncertainties” on page 18.

Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, financing and credit market risk, risks relating to the Company’s salon expansion strategy and the risks of competition in the luxury jewelry segment. Please see page 18 of this Interim Report, as well as the Company’s Annual Report, available at http://www.sedar.com/, for a discussion of these and other risks and uncertainties involved in Harry Winston Diamond Corporation’s operations.

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

Summary Discussion

Harry Winston Diamond Corporation is a specialist diamond company focusing on the mining and retail segments of the diamond industry. The Company supplies rough diamonds to the global market from production received from its 40% ownership interest in the Diavik Diamond Mine, located off Lac de Gras in Canada’s Northwest Territories. The Company also owns a 100% interest in Harry Winston Inc., the premier fine jewelry and watch retailer. Harry Winston Diamond Corporation’s mission is to deliver shareholder value through the enhanced earning power and longevity of the Diavik Diamond Mine asset as the cornerstone of a profitable synergy with the Harry Winston(R) brand. In a changing diamond market-place, Harry Winston Diamond Corporation has charted a unique course to continue to build shareholder value.

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

   Market Commentary    The Diamond Market   

The rough diamond market has enjoyed strong price growth during the last six months as purchases from the emerging market economies have more than compensated for the US and Japanese softness in the higher quality stones that are the key component of Harry Winston’s rough diamond sales. Lower quality diamonds have seen price declines in some categories despite the price increases in better quality diamonds.

Looking forward, the strengthening US dollar is beginning to drive local currency price increases internationally and a period of gains can be expected in the short term. In the longer term, a continuing shrinkage of mine supply coupled with expanded demand from the BRIC (Brazil, Russia, India, China) economies is expected to underpin further price increases, especially as the US and Japan, historically the world’s two largest diamond consumers, return to economic health.

The Retail Jewelry Market

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

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

Consolidated Financial Results

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

   (expressed in thousands of United States dollars except per share amounts   and where otherwise noted)   (quarterly results are unaudited)    -------------------------------------------------------------------------                               2009      2009      2008      2008      2008                                 Q2        Q1        Q4        Q3        Q2   -------------------------------------------------------------------------   Sales                   $186,119  $156,079  $188,195  $176,478  $173,269   Cost of sales             73,542    73,149    83,637    74,591    81,827   -------------------------------------------------------------------------   Gross margin             112,577    82,930   104,558   101,887    91,442   Gross margin (%)           60.5%     53.1%     55.6%     57.7%     52.8%   Selling, general and    administrative    expenses                 39,194    43,285    45,494    35,539    35,201   -------------------------------------------------------------------------   Earnings from    operations               73,383    39,645    59,064    66,348    56,241   -------------------------------------------------------------------------   Interest and    financing expenses       (5,366)   (5,453)   (7,082)   (7,422)   (7,222)   Other income (expense)       815       246       706       594       545   Insurance settlement           -         -    13,488         -         -   Foreign exchange    gain (loss)               5,301       155    22,270   (40,584)  (11,785)   -------------------------------------------------------------------------   Earnings before    income taxes             74,133    34,593    88,446    18,936    37,779   Income taxes (recovery)   24,185    13,336    (1,968)   26,197    17,747   -------------------------------------------------------------------------   Earnings (loss) before    minority interest        49,948    21,257    90,414    (7,261)   20,032   Minority interest              1         1       (34)       90       (26)   -------------------------------------------------------------------------   Net earnings (loss)     $ 49,947  $ 21,256  $ 90,448  $ (7,351) $ 20,058   -------------------------------------------------------------------------   -------------------------------------------------------------------------   Basic earnings (loss)    per share              $   0.81  $   0.35  $   1.55  $  (0.13) $   0.34   Diluted earnings (loss)    per share              $   0.81  $   0.35  $   1.54  $  (0.13) $   0.33   Cash dividends declared    per share              $   0.05  $   0.05  $   0.05  $   0.25  $   0.25   Total assets(i)         $  1,637  $  1,591  $  1,494  $  1,433  $  1,367   Total long-term    liabilities(i)         $    617  $    634  $    660  $    530  $    486   -------------------------------------------------------------------------     -------------------------------------------------------------------------                                                             Six       Six                                                           Months    Months                                                            Ended     Ended                               2008      2007      2007   July 31,  July 31,                                 Q1        Q4        Q3      2008      2007   -------------------------------------------------------------------------   Sales                   $141,365  $154,328  $145,232  $342,198  $314,634   Cost of sales             71,132    78,559    74,636   146,691   152,959   -------------------------------------------------------------------------   Gross margin              70,233    75,769    70,596   195,507   161,675   Gross margin (%)           49.7%     49.1%     48.6%     57.1%     51.4%   Selling, general and    administrative    expenses                 34,211    38,590    33,480    82,479    69,412   -------------------------------------------------------------------------   Earnings from    operations               36,022    37,179    37,116   113,028    92,263   -------------------------------------------------------------------------   Interest and    financing expenses       (6,132)   (6,441)   (5,570)  (10,819)  (13,354)   Other income (expense)       913      (111)    1,764     1,061     1,458   Insurance settlement           -         -         -         -         -   Foreign exchange    gain (loss)             (13,292)    9,831    (1,560)    5,456   (25,077)   -------------------------------------------------------------------------   Earnings before    income taxes             17,511    40,458    31,750   108,726    55,290   Income taxes (recovery)   14,118    13,169    13,005    37,521    31,865   -------------------------------------------------------------------------   Earnings (loss) before    minority interest         3,393    27,289    18,745    71,205    23,425   Minority interest            140        (5)      (86)        2       114   -------------------------------------------------------------------------   Net earnings (loss)     $  3,253  $ 27,294  $ 18,831  $ 71,203  $ 23,311   -------------------------------------------------------------------------   -------------------------------------------------------------------------   Basic earnings (loss)    per share              $   0.06  $   0.47  $   0.32  $   1.17  $   0.40   Diluted earnings (loss)    per share              $   0.05  $   0.46  $   0.32  $   1.17  $   0.39   Cash dividends declared    per share              $   0.25  $   0.25  $   0.25  $   0.10  $   0.50   Total assets(i)         $  1,315  $  1,288  $  1,246  $  1,637  $  1,367   Total long-term    liabilities(i)         $    408  $    536  $    530  $    617  $    486   -------------------------------------------------------------------------    (i) Total assets and total long-term liabilities are expressed in       millions of United States dollars.        The comparability of quarter-over-quarter results is impacted by       seasonality for both the mining and retail segments. Harry Winston       Diamond Corporation expects that the quarterly results for its mining       segment will continue to fluctuate depending on the seasonality of       production at the Diavik Diamond Mine, the number of rough diamond       sales events conducted during the quarter, and the volume, size and       quality distribution of rough diamonds delivered from the Diavik       Diamond Mine in each quarter. The quarterly results for the retail       segment are also seasonal, with generally higher sales during the       fourth quarter due to the holiday season. See "Segmented Analysis" on       page 8 for additional information.     Three Months Ended July 31, 2008 Compared to Three Months Ended   July 31, 2007    Consolidated Net Earnings   

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

Consolidated Sales

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

Consolidated Cost of Sales and Gross Margin

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

Consolidated Selling, General and Administrative Expenses

The principal components of selling, general and administrative (“SG&A”) expenses include expenses for salaries and benefits, advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of $39.2 million for the second quarter, compared to $35.2 million in the comparable quarter of the prior year.

Included in SG&A expenses for the second quarter are $5.2 million for the mining segment as compared to $5.9 million for the comparable quarter of the prior year, and $34.0 million for the retail segment as compared to $29.3ӚÓš million for the comparable quarter of the prior year. For the mining segment, the decrease in SG&A expenses was primarily due to a mark-to-market reduction in stock-based compensation. For the retail segment, the increase in SG&A expenses was as a result of our continued investment in the Harry Winston brand, and reflected an increase in salaries and benefits, rent and building related expenses and depreciation and amortization expense. See “Segmented Analysis” on page 8 for additional information.

Consolidated Income Taxes

The Company recorded a tax expense of $24.2 million during the second quarter, compared to a tax expense of $17.7 million in the comparable quarter of the prior year. The Company’s effective income tax rate for the quarter, excluding Harry Winston’s retail segment, is 33%, which is based on a statutory income tax rate of 31% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.

The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. The weakening of the Canadian dollar during the second quarter resulted in an unrealized foreign exchange gain of $4.4 million on the revaluation of the Canadian denominated future income tax liability, compared to an unrealized foreign exchange loss of $9.6 million recorded in the comparable quarter of the prior year. This unrealized foreign exchange gain is not taxable for Canadian income tax purposes.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2027.

The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:

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

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

Consolidated Other Income

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

Consolidated Foreign Exchange Gain

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

   Six Months Ended July 31, 2008 Compared to Six Months Ended July 31, 2007    Consolidated Net Earnings   

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

Consolidated Sales

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

Consolidated Cost of Sales and Gross Margin

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

Consolidated Selling, General and Administrative Expenses

The Company incurred SG&A expenses of $82.5 million for the six months ended July 31, 2008, compared to $69.4 million for the six months ended JulyӚÓš 31, 2007.

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

Consolidated Income Taxes

The Company recorded a tax expense of $37.5 million during the six months ended July 31, 2008, compared to a tax expense of $31.9 million in the comparable period of the prior year. The Company’s effective income tax rate for the quarter, excluding Harry Winston’s retail segment, is 35%, which is based on a statutory income tax rate of 31% adjusted for various items including Northwest Territories mining royalty, impact of foreign exchange, and earnings subject to tax different than the statutory rate.

During the six months ended July 31, 2008, the Company recorded an unrealized foreign exchange gain of $5.3 million on the revaluation of the Canadian denominated future income tax liability, as compared to an unrealized foreign exchange loss of $23.3 million recorded in the comparable period of the prior year. This unrealized foreign exchange gain is not taxable for Canadian income tax purposes.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2027.

The Company has provided a table below summarizing the movement from the statutory to the effective income tax rate as a percentage of earnings before taxes:

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

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

Consolidated Other Income

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

Consolidated Foreign Exchange Gain

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

   Segmented Analysis    The operating segments of the Company include mining and retail segments.    Mining    The mining segment includes the production and sale of rough diamonds.     (expressed in thousands of United States dollars) (quarterly results are   unaudited)   -------------------------------------------------------------------------                               2009      2009      2008      2008      2008                                 Q2        Q1        Q4        Q3        Q2   -------------------------------------------------------------------------   Sales                   $105,014  $ 81,393  $103,238  $122,711  $105,071   Cost of sales             32,390    32,150    36,962    45,985    46,217   -------------------------------------------------------------------------   Gross margin              72,624    49,243    66,276    76,726    58,854   Gross margin (%)           69.2%     60.5%     64.2%     62.5%     56.0%   Selling, general and    administrative    expenses                  5,151     7,208     5,663     6,748     5,861   -------------------------------------------------------------------------   Earnings from    operations             $ 67,473  $ 42,035  $ 60,613  $ 69,978  $ 52,993   -------------------------------------------------------------------------   -------------------------------------------------------------------------     -------------------------------------------------------------------------                                                              Six       Six                                                           Months    Months                                                            Ended     Ended                                2008      2007      2007  July 31,  July 31,                                 Q1        Q4        Q3      2008      2007   -------------------------------------------------------------------------   Sales                   $ 82,752  $ 81,035  $ 90,754  $186,407  $187,823   Cost of sales             40,516    39,413    45,461    64,540    86,733   -------------------------------------------------------------------------   Gross margin              42,236    41,622    45,293   121,867   101,090   Gross margin (%)           51.0%     51.4%     49.9%     65.4%     53.8%   Selling, general and    administrative    expenses                  5,087     7,397     4,665    12,359    10,948   -------------------------------------------------------------------------   Earnings from    operations             $ 37,149  $ 34,225  $ 40,628  $109,508  $ 90,142   -------------------------------------------------------------------------   -------------------------------------------------------------------------     Three Months Ended July 31, 2008 Compared to Three Months Ended   July 31, 2007    Mining Sales   

Rough diamond sales for the second quarter totalled $105.0 million compared to $105.1 million in the comparable quarter of the prior year resulting from lower carat production offset by higher pricing. Rough diamond production decreased 23% in the second calendar quarter from the prior year as a result of the continuing grade variation in the A-154 South kimberlite pipe combined with the initial stripping of low grade A-418 ore mixed with waste overburden material.

The Company held two primary rough diamond sales in the second quarter compared to three in the comparable quarter of the prior year. The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of primary and secondary sales events conducted at each sales location during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter.

Mining Cost of Sales and Gross Margin

The Company’s second quarter cost of sales was $32.4 million for a gross margin of 69.2% compared to a $46.2 million cost of sales and a gross margin of 56.0% in the comparable quarter of the prior year. The reduction in cost of sales resulted in part from a greater proportion of cost attributable to development activity versus production activity. Also included in the second quarter is a $4.3 million insurance settlement relating to an excavator fire that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The settlement represents the recovery of the cost of the excavator that was previously written off along with incremental operating expenses relating to the procurement of a replacement excavator. Total proceeds of $5.0 million from the insurance settlement are expected to be received in the third quarter, resulting in a gain of approximately $0.7 million. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and the nature of the mining activities.

A substantial portion of cost of sales is mine operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes rough diamond sorting costs, which consist of the Company’s cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

Mining Selling, General and Administrative Expenses

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

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

Rough diamond sales for the six months ended July 31, 2008 totalled $186.4 million compared to $187.8 million in the comparable period of the prior year resulting from a combination of lower carat production offset by higher pricing. Rough diamond production decreased 27% during the first half of the calendar year from the prior year as the result of the continuing grade variation in the A-154 South kimberlite pipe combined with the initial stripping of low grade A-418 ore mixed with waste overburden material.

The Company held four primary rough diamond sales, one of which was an open-market tender, during the six months ended July 31, 2008, compared to five in the comparable period of the prior year. Harry Winston Diamond Corporation expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Mine, the number of primary and secondary sales events conducted at each sales location during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Mine in each quarter.

Mining Cost of Sales and Gross Margin

For the six months ended July 31, 2008, cost of sales was $64.5 million for a gross margin of 65.4% compared to $86.7 million cost of sales and a gross margin of 53.8% in the comparable quarter of the prior year. The reduction in cost of sales resulted primarily from a greater proportion of cost attributable to development activity versus production activity. Also included in the six months ended July 31, 2008, is a $4.3 million insurance settlement relating to an excavator fire that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine. The settlement represents the recovery of the cost of the excavator that was previously written off along with incremental operating expenses relating to the procurement of a replacement excavator. Total proceeds of $5.0 million from the insurance settlement are expected to be received in the third quarter, resulting in a gain of approximately $0.7 million. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and the nature of the mining activities.

A substantial portion of cost of sales is mine operating costs, which are incurred at the Diavik Diamond Mine. Cost of sales also includes rough diamond sorting costs, which consist of the Company’s cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

Mining Selling, General and Administrative Expenses

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

Retail

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

   (expressed in thousands of United States dollars) (quarterly results are   unaudited)    -------------------------------------------------------------------------                               2009      2009      2008      2008      2008                                 Q2        Q1        Q4        Q3        Q2   -------------------------------------------------------------------------   Sales                   $ 81,105  $ 74,686  $ 84,957  $ 53,767  $ 68,198   Cost of sales             41,152    40,999    46,675    28,606    35,610   -------------------------------------------------------------------------   Gross margin              39,953    33,687    38,282    25,161    32,588   Gross margin (%)           49.3%     45.1%     45.1%     46.8%     47.8%   Selling, general and    administrative    expenses                 34,043    36,077    39,831    28,791    29,340   -------------------------------------------------------------------------   Earnings (loss) from    operations             $  5,910  $ (2,390) $ (1,549) $ (3,630) $  3,248   -------------------------------------------------------------------------   -------------------------------------------------------------------------     -------------------------------------------------------------------------                                                              Six       Six                                                           Months    Months                                                            Ended     Ended                               2008      2007      2007   July 31,  July 31,                                 Q1        Q4        Q3      2008      2007   -------------------------------------------------------------------------   Sales                   $ 58,613  $ 73,293  $ 54,478  $155,791  $126,811   Cost of sales             30,616    39,146    29,175    82,151    66,226   -------------------------------------------------------------------------   Gross margin              27,997    34,147    25,303    73,640    60,585   Gross margin (%)           47.8%     46.6%     46.4%     47.3%     47.8%   Selling, general and    administrative    expenses                 29,124    31,193    28,815    70,120    58,464   -------------------------------------------------------------------------   Earnings (loss) from    operations             $ (1,127) $  2,954  $ (3,512) $  3,520  $  2,121   -------------------------------------------------------------------------   -------------------------------------------------------------------------     Three Months Ended July 31, 2008 Compared to Three Months Ended   July 31, 2007    Retail Sales   

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

Retail Cost of Sales and Gross Margin

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

Retail Selling, General and Administrative Expenses

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

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

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

Retail Cost of Sales and Gross Margin

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

Retail Selling, General and Administrative Expenses

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

Operational Update

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

Mining Segment

During the second calendar quarter of 2008, the Diavik Diamond Mine produced 2.5 million carats from 0.72 million tonnes of ore sourced predominantly from the A-154 South kimberlite pipe, with small volumes sourced from the A-154 North and A-418 kimberlite pipes. Rough diamond production decreased 23% in the second calendar quarter from the prior year as the result of the continuing grade variation in the A-154 South kimberlite pipe combined with the initial stripping of low grade A-418 ore mixed with waste overburden material.

Ore was recovered from the A-418 kimberlite pipe as part of the ongoing pre-stripping of waste overburden to prepare the pipe for open pit production. This initial ore is low grade, weathered kimberlite capping the A-418 pipe, diluted with overlying glacial till. Sustainable full-scale open pit production from A-418 is scheduled to begin before the end of the calendar year.

Work continued on schedule and on budget to prepare the Diavik Diamond Mine site for underground mining. Below surface, tunnelling work passed 8ӚÓš kilometres, with tunnel advance rates accelerating during the second calendar quarter. Construction progressed as planned on the new crusher and paste backfill plant, on expansions to the water treatment and power plants, and on additional permanent accommodation facilities. Diamond production from underground mining is scheduled to begin in calendar 2009, and is expected to replace open pit mining by calendar 2012.

A $50 million capital expenditure for a small diamond recovery project was approved during the second calendar quarter to make additions and modifications to the ore processing plant to recover very small diamonds, reflecting the demand for this product. The first recovery of small diamonds is expected in calendar 2010. The Company estimates its share of this capital expenditure to be approximately $20 million.

   Harry Winston Diamond Corporation's 40% Share of Diavik Diamond Mine   Production    (reported on a one-month lag)                                         Three     Three       Six       Six                                       Months    Months    Months    Months                                        Ended     Ended     Ended     Ended                                      June 30,  June 30,  June 30,  June 30,                                         2008      2007      2008      2007   -------------------------------------------------------------------------   Diamonds recovered (000s carats)     1,009     1,317     1,723     2,351   Grade (carats/tonne)                  3.52      5.12      3.74      5.05   -------------------------------------------------------------------------    Retail Segment   

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

   Liquidity and Capital Resources    Working Capital   

As at July 31, 2008, the Company had unrestricted cash and cash equivalents of $56.3 million and contingency cash collateral and reserves of $25.3 million as required under the Company’s debt arrangements, compared to $49.6 million and $25.6 million, respectively, at January 31, 2008. The Company had cash on hand and balances with banks of $56.3 million and short-term investments of $nil at July 31, 2008 compared to $33.0 million and $16.6ӚÓš million, respectively, at January 31, 2008. Short-term investments are held in overnight deposits. Total cash resources at July 31, 2008 were $81.6ӚÓš million, $6.4 million higher than the total cash resources of $75.2ӚÓš million at January 31, 2008.

Working capital decreased to $212.7 million at July 31, 2008 from $220.0ӚÓš million at January 31, 2008.

The Company’s working capital and working capital requirements fluctuate from quarter to quarter depending on, among other factors, the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter, along with the seasonality and salon expansion in the retail segment. The Company’s principal working capital needs include investments in inventory, prepaid expenses and other current assets, and accounts payable and income taxes payable. The Company’s cash requirements are driven by differences in the timing of cash receipts and the cash outflows. The Company has the ability, under certain conditions, to draw on its various credit facilities to finance these timing differences.

Cash Flow from Operations

During the quarter ended July 31, 2008, the Company generated $46.2ӚÓš million in cash from operations, compared to $29.8 million in the comparable quarter of the prior year.

During the second quarter, the Company increased accounts receivable by $6.5 million, decreased prepaid expenses and other current assets by $6.0ӚÓš million, increased inventory by $4.4 million, decreased accounts payable and accrued liabilities by $3.9 million, and decreased income taxes payable by $2.9 million.

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

Financing Activities

During the second quarter, the Company repaid $14.7 million of its senior secured term facilities. At July 31, 2008, the Company had $49.2 million outstanding on its senior secured term credit facilities and $50.0 million outstanding on its senior secured revolving credit facility. In comparison, at January 31, 2008, $76.4 million was outstanding on the term credit facilities and $50.0 million was outstanding on the secured revolving credit facility.

As at July 31, 2008, Harry Winston Inc. had $166.1 million outstanding on its $250.0 million secured five-year




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