6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM 6-K
 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16

OR 15D-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of  May, 2009 Commission File Number:  0-17227

HARRY WINSTON DIAMOND CORPORATION

(Translation of registrant’s name into English)

P.O. Box 4569, Station A

Toronto, ON, Canada   M5W 4T9

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

	Form 20-F £	Form 40-F Q
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): £
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): £
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
	Yes £	No  Q

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED the 6^th day of May, 2009.

HARRY WINSTON DIAMOND CORPORATION
(Registrant)
By:	/s/	LYLE R. HEPBURN
	Name:	Lyle R. Hepburn
	Title:	Corporate Secretary

EXHIBIT INDEX

EXHIBIT	DESCRIPTION OF EXHIBIT
1	Notice of Annual Meeting and Management Proxy Circular of Harry Winston Diamond Corporation dated April 16, 2009.
2	Proxy solicited by Management and the Board of Directors of Harry Winston Diamond Corporation.
3	Annual Request Form in accordance with National Instrument 51-102 regarding Supplemental Mailing List for Harry Winston Diamond Corporation.
4	2008-2009 Annual Report of Harry Winston Diamond Corporation to its Shareholders.

EX-1

Exhibit 1

HARRY WINSTON DIAMOND CORPORATION

MANAGEMENT PROXY CIRCULAR

For the
Annual Meeting of Shareholders
June 4, 2009

____________________________________________________

April 16, 2009

TABLE OF CONTENTS

DESCRIPTION	PAGE
INVITATION TO SHAREHOLDERS	1
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS	2
MANAGEMENT PROXY CIRCULAR	3
Q&AONPROXYVOTING	3
REPORTINGCURRENCY	5
BUSINESSOFTHEMEETING	6
Financial Statements	6
Election of Directors	6
Appointment of Auditors	7
Other Matters	8
BOARDOFDIRECTORS	8
Nominees for Election to the Board of Directors	8
Director Compensation Table	11
Incentive Plan Awards	13
Meetings Held and Attendance of Directors	14
Directors’ and Officer’s Liability Insurance	15
CORPORATEGOVERNANCEDISCLOSURE	15
REPORTOFTHEAUDITCOMMITTEE	15
REPORTOFTHEHUMANRESOURCES&COMPENSATIONCOMMITTEE	16
REPORTOFTHENOMINATING&CORPORATEGOVERNANCECOMMITTEE	17
STATEMENTOFEXECUTIVECOMPENSATION	18
Compensation Discussion and Analysis	18
Performance Graph	24
Option-Based Awards	25
Summary Compensation Table	25
Incentive Plan Awards	26
Pension Plan Benefits	26
Termination and Change of Control Benefits	27
SECURITIESAUTHORIZEDFORISSUANCEUNDEREQUITYCOMPENSATIONPLANS	28
INDEBTEDNESSOFDIRECTORSANDEXECUTIVEOFFICERS	30
INTERESTOFINFORMEDPERSONSINMATERIALTRANSACTIONS	30
ADDITIONALINFORMATION	31
BOARDAPPROVAL	31
SCHEDULE1-STATEMENTOFCORPORATEGOVERNANCEPRACTICES	32
Board of Directors	32
Majority Voting Policy	33
Board Mandate	33
Position Descriptions	34
Orientation and Continuing Education	34
Ethical Business Conduct	34
Nomination of Directors	35
Compensation	35
Board Committees	36
Assessments	36

HARRY WINSTON DIAMOND CORPORATION

INVITATION TO SHAREHOLDERS

Dear Shareholder:

On behalf of the Board of Directors, management and employees, we invite you to attend Harry Winston Diamond Corporation's Annual Meeting of Shareholders on Thursday, June 4, 2009.

The items of business to be considered at this Meeting are described in the Notice of Annual Meeting and Management Proxy Circular.  No matter how many shares you hold, your participation at shareholders' meetings is very important.  If you are unable to attend the Meeting in person, we encourage you to vote by following the voting instructions included on the proxy form.

During the Meeting, we will review Harry Winston's business during fiscal 2008/09 and our plans for the future.  You will also have an opportunity to ask questions and to meet your Directors and Executives.

We look forward to seeing you at the Meeting.

Sincerely,

Robert A. Gannicott	Thomas J. O’Neill
Chairman & Chief Executive Officer	President

1

HARRY WINSTON DIAMOND CORPORATION
P.O. Box 4569, Station A
Toronto, Ontario    M5W 4T9

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

NOTICE IS HEREBY GIVEN that an Annual Meeting of Shareholders (the “Meeting”) of HARRY WINSTON DIAMOND CORPORATION (the “Corporation”) will be held at the Fairmont Royal York Hotel, 100 Front Street West, Toronto, Ontario at 10:00 a.m. (Toronto time) on Thursday, June 4, 2009, for the following purposes:

1.

to receive the audited consolidated financial statements of the Corporation for the fiscal year ended January 31, 2009, together with the report of the auditors thereon;

2.

to elect directors;

3.

to appoint auditors and authorize the directors to fix their remuneration; and

4.

to transact such other business as may properly be brought before the Meeting or any adjournment thereof.

The accompanying Management Proxy Circular of the Corporation provides additional information relating to the matters to be dealt with at the Meeting and forms part of this notice.

Shareholders who cannot attend the Meeting in person may vote by proxy.  Instructions on how to complete and return the proxy are provided with the proxy form and are described in the Management Proxy Circular.  To be valid, proxies must be received by CIBC Mellon Trust Company by mail at P.O. Box 721, Agincourt, Ontario, Canada, M1S 0A1 or by fax to 1-866-781-3111 (toll free) or 416-368-2502, no later than 5:00 p.m. (Toronto time) on June 2, 2009, or if the Meeting is adjourned, no later than 10:00 a.m. (Toronto time) on the last business day preceding the day to which the Meeting is adjourned.

BY ORDER OF THE BOARD

Lyle R. Hepburn
Corporate Secretary
April 16, 2009

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HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT PROXY CIRCULAR

All information is as of April 16, 2009 and all dollar figures are in United States dollars, unless otherwise indicated.

Q&A ON PROXY VOTING

Q:

What am I voting on?

A:

Shareholders are voting on the election of directors to the Board of the Corporation, the appointment of auditors for the Corporation and authorizing the directors to fix the remuneration of the auditors.

Q:

Who is entitled to vote?

A:

If you owned your shares as at the close of business on April 16, 2009, you are entitled to vote. Each Common Share is entitled to one vote on those items of business identified in the Notice of Annual Meeting of Shareholders.

Q:

How do I vote?

A:

There are two ways you can vote. You may vote in person at the Meeting, in which case please read the instructions set out after the following question. If you do not plan to attend the Meeting and you are a registered shareholder you may sign the enclosed form of proxy appointing the named persons or some other person you choose, who need not be a shareholder, to represent you as proxyholder and vote your shares at the Meeting. If your shares are held in the name of a nominee (a bank, trust company, securities broker, trustee or other), you will have received from your nominee either a request for voting instructions or a form of proxy for the number of shares you hold. For your shares to be voted, please follow the voting instructions provided by your nominee.

Q:

What if I plan to attend the Meeting and vote in person?

A:

If you are a registered shareholder and plan to attend the Meeting and wish to vote your shares in person at the Meeting, do not complete or return the form of proxy. Your vote will be taken and counted at the Meeting. Please register with the transfer agent, CIBC Mellon Trust Company, upon arrival at the Meeting.

If your shares are held in the name of a nominee, the Corporation may have no record of your shareholdings or of your entitlement to vote unless your nominee has appointed you as proxyholder. Therefore, if you wish to vote in person at the Meeting, insert your own name in the space provided on the request for voting instructions or form of proxy and return it by following the instructions provided to you by your nominee. Do not complete the voting instructions on the form, as you will be voting at the Meeting. Please register with the transfer agent, CIBC Mellon Trust Company, upon arrival at the Meeting.

Q:

Who is soliciting my proxy?

A:

The enclosed form of proxy is being solicited by the management of the Corporation and the associated costs will be borne by the Corporation. The solicitation will be made primarily by mail but may also be made by telephone, in writing or in person by employees of the Corporation.

Q:

What if I sign the form of proxy enclosed with this Management Proxy Circular?

A:

Signing the enclosed form of proxy gives authority to Robert A. Gannicott or Matthew W. Barrett, each of whom is a director of the Corporation, or to another person you have appointed, to vote your shares at the Meeting.

3

Q:

Can I appoint someone other than these directors to vote my shares?

A:

Yes. Write the name of this person, who need not be a shareholder, in the blank space provided in the form of proxy.

It is important to ensure that any other person you appoint is attending the Meeting and is aware that he or she has been appointed to vote your shares. Proxyholders should, upon arrival at the Meeting, present themselves to a representative of CIBC Mellon Trust Company.

Q:

What do I do with my completed proxy?

A:

If you are a registered shareholder, return the proxy to the Corporation’s transfer agent, CIBC Mellon Trust Company, in the envelope provided, or by fax to (416) 368-2502, so that it arrives no later than 5:00 p.m. (Eastern Standard Time) on Tuesday, June 2, 2009 to record your vote. If your shares are held in the name of a nominee, please follow the voting instructions provided by your nominee.

Q:

If I change my mind, can I take back my proxy once I have given it?

A:

Yes. If you change your mind and wish to revoke your proxy, prepare a written statement to this effect. The statement must be signed by you or your attorney as authorized in writing or, if the shareholder is a corporation, under its corporate seal or by an officer or attorney of the corporation duly authorized. This statement must be delivered to the Corporate Secretary of the Corporation at the following address no later than 5:00 p.m. (Eastern Standard Time) on Tuesday, June 2, 2009 or to the Chairman on the day of the Meeting, June 4, 2009, or any adjournment of the Meeting.

Harry Winston Diamond Corporation
P. O. Box 4569, Station A, Toronto, Ontario    M5W 4T9
Attention:            Lyle R. Hepburn
Fax No.:                416-362-2230

Q:

How will my shares be voted if I give my proxy?

A:

The persons named on the form of proxy must vote for or against or withhold from voting your shares in accordance with your directions, or you can let your proxyholder decide for you. In the absence of such directions, proxies received by management will be voted in favour of the election of directors to the Board and the appointment of auditors.

Q:

What if amendments are made to these matters or if other matters are brought before the Meeting?

A:

The persons named in the form of proxy will have discretionary authority with respect to amendments or variations to matters identified in the Notice of Annual Meeting of Shareholders and with respect to other matters which may properly come before the Meeting. As of the time of printing of this Management Proxy Circular, management of the Corporation knows of no such amendment, variation or other matter expected to come before the Meeting. If any other matters properly come before the Meeting, the persons named in the form of proxy will vote on them in accordance with their best judgment.

4

Q:

How many shares are entitled to vote?

A:

As of April 16, 2009 (the “Record Date”), there were outstanding 76,572,092 Common Shares of the Corporation. Each registered shareholder has one vote for each Common Share held at the close of business on the Record Date.

To the knowledge of the directors and senior officers of the Corporation, as of date hereof, the following table sets forth the parties who beneficially own, directly or indirectly, or exercise control or direction over voting securities of the Corporation:

Name of Shareholder and Municipality of Residence	Number of Common Shares Owned, Controlled or Directed	% of Outstanding Common Shares
Kinross Gold Corporation Toronto, Ontario, Canada	15,200,000	19.9%
M&G Investment Management Limited(1) London, United Kingdom	12,146,397	15.9%

(1)

Vanguard Precious Metals and Mining Fund exercises voting control over 7,700,000 of the common shares over which M&G Investment Management Limited exercise control and direction.

Q:

How will the votes be counted?

A:

Each question brought before the Meeting is determined by a majority of votes cast on the question. In the case of equal votes, the Chairman of the Meeting is entitled to a second or casting vote.

Q:

Who counts the votes?

A:

The Corporation’s transfer agent, CIBC Mellon Trust Company, counts and tabulates the proxies. This is done independently of the Corporation to preserve the confidentiality of individual shareholder votes. Proxies are referred to the Corporation only in cases where a shareholder clearly intends to communicate with management or when it is necessary to do so to meet the requirements of applicable law.

Q:

If I need to contact the transfer agent, how do I reach them?

A:

You can contact the transfer agent by mail at:

Transfer Agent and Registrar, CIBC Mellon Trust Company
P.O. Box 7010, Adelaide Street Postal Station, Toronto, Ontario    M5C 2W9

or by telephone:	416-643-5500 or 1-800-387-0825	Fax:	416-643-5501
E-mail:	inquiries@cibcmellon.com	Website:	www.cibcmellon.com

REPORTING CURRENCY

The reporting currency of the Corporation is the United States dollar.  Dollar amounts reported in the various tables in this Management Proxy Circular have been converted from the Canadian dollar as follows:

1.

The Canadian currency exchange rate was obtained from the Bank of Canada closing rates for the applicable date (the “Exchange Rate”).  The Exchange Rates applied were as follows:

(a)

the Exchange Rate for February 1, 2008 (the “Year-Beginning Exchange Rate”) was 1.0060;

(b)

the Exchange Rate for January 31 , 2009 (the “Year-End Exchange Rate”) was 0.8153;

(c)

the Exchange Rate for March 31, 2009 (the “March Exchange Rate”) was 0.7927;

5

(d)

the average Exchange Rate for the fiscal period  February 1, 2008 to January 31, 2009 (the “Average Exchange Rate”)  was 0.9223; and

(e)

the  Exchange Rate for February 1, May 1, August 1, and November 1, 2009 (the “Quarterly Exchange Rate” was 1.0060, 0.9811, 0.9736 and 0.8302, respectively.

2.

The dollar amounts shown for DSUs granted to directors represent the Canadian dollar amount credited to their respective accounts on a quarterly basis converted using the Quarterly Exchange Rate.

3.

The cash retainers paid to directors represent the Canadian dollar amount paid to them on a quarterly basis converted using the Quarterly Exchange Rate.

4.

The value of shares and options held by directors was converted using the March Exchange Rate.

5.

The value of RSUs granted to Named Executive Officers was converted using the Year-Beginning Exchange Rate.

6.

The value of outstanding RSUs of Named Executive Officers was converted using the Year-End Exchange Rate

7.

Cash compensation paid to Named Executive Officers, and in respective consulting services referred to herein, was converted using the Average Exchange Rate.

BUSINESS OF THE MEETING

Financial Statements

The Consolidated Financial Statements for the year ended January 31, 2009 are included in the Annual Report, which has been mailed to shareholders with this Management Proxy Circular.

Election of Directors

The Articles of the Corporation provide that the minimum number of directors shall be three and the maximum number shall be 12. There are currently nine directors. The directors of the Corporation are elected annually and hold office until the next annual meeting of shareholders or until their successors in office are duly elected or appointed, unless a director’s office is earlier vacated in accordance with the by-laws of the Corporation or the Canada Business Corporations Act, or he or she becomes disqualified to act as a director.

The Board of Directors of the Corporation (the “Board”) has fixed the number of directors to be elected at the Meeting at nine. It is proposed that the persons set out herein be nominated for election as directors of the Corporation for the ensuing year.  In 2009, the Board decided to change the director election process in order to promote enhanced director accountability.  Previously, shareholders were given the option of voting for or withholding their votes from an entire slate of director nominees.  The new director election process provides shareholders with the right to vote for or to withhold their votes in respect of individual director nominees.  This new process will encourage individual board members to be more diligent in the performance of their duties by providing shareholders with the right to vote for individual directors based on their individual performance as a director or withhold their votes for a director who fails to meet the standards requ ired by the shareholders.

6

On January 14, 2009, the Board adopted a majority voting policy stipulating that for uncontested elections, if a majority of the votes represented by proxies validly deposited prior to the Meeting are “withheld” from voting in respect of such director nominee’s election, the nominee will submit his or her resignation promptly after the Meeting for the Nominating & Corporate Governance Committee’s consideration. The Committee will make a recommendation to the Board after reviewing the matter, and the Board’s decision to accept or reject the resignation will be disclosed to the public. The nominee will not participate in any Committee or Board deliberations in considering the resignation. In a contested election, a plurality vote standard will continue to apply. A full description of the majority voting policy is included in Schedule 1 of this Management Proxy Circular.

Management does not contemplate that any of the persons proposed to be nominated will be unable to serve as a director. If prior to the Meeting any of such nominees is unable or unwilling to serve, the persons named in the accompanying form of proxy will vote for another nominee or nominees in their discretion if additional nominations are made at the Meeting.

Unless a proxy specifies that the Common Shares it represents should be withheld from voting in respect of the election of directors or voted in accordance with the specification in the proxy, the persons named in the enclosed form of proxy intend to vote FOR the election of the nominees whose names are set out in this Management Proxy Circular.

The list of directors and their biographies can be found in this Management Proxy Circular on pages 8 to 11 (see “Nominees for Election to Board of Directors”). Information regarding Director Compensation can be found in this Management Proxy Circular on pages 11 to 13 (See “Director Compensation Table” and “Incentive Plan Awards). Each director's attendance at Board and Committee meetings can be found in this Management Proxy Circular on page 14 (see “Board of Directors Meetings Held and Attendance of Directors”).

To the knowledge of the Corporation, no director of the Corporation is, or has been in the last 10 years, (a) a director, chief executive officer or chief financial officer of a company that (i) while that person was acting in that capacity, was the subject of a cease trade order or similar order (including a management cease trade order) or an order that denied the issuer access to any exemptions under Canadian securities legislation, for a period of more than 30 consecutive days, or (ii) after that person ceased to act in that capacity, was subject of a cease trade or similar order or an order that denied the issuer access to any exemption under Canadian securities legislation, for a period of more than 30 consecutive days which resulted from an event that occurred while that person acted in such capacity, or (b) a director or executive officer of a company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, m ade a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or (c) become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold its assets.

Appointment of Auditors

Shareholders will be asked to vote for the reappointment of KPMG LLP, as auditors for the Corporation for the ensuing year, and to authorize the directors of the Corporation to fix their remuneration.  

7

Fees paid to KPMG LLP during the years ended January 31, 2009 and 2008 were as follows:

	2009 (US$)	2008 (US$)
Audit Fees(1)	1,744,037	1,836,759
Audit Related Fees(2)	66,367	70,955
Tax Fees(3)	188,049	174,635
All other Fees(4)	83,779	14,203

(1)

Includes audit and review services.

(2)

Includes SOX 404 work and various audit services required as per legal obligations.

(3)

Primarily tax advisory services.

(4)

Includes IFRS consultation and review of annual meeting materials.

The Audit Committee has considered whether the magnitude and nature of these services is compatible with maintaining the independence of the external auditors and has determined that the independence of the external auditors is maintained.

Other Matters

Management does not know of any other matters to be presented to the Meeting.  If other matters should be properly presented at the Meeting, the persons named in the accompanying form of proxy will vote the Common Shares represented by such proxy with respect to such matters in accordance with their best judgment.

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BOARD OF DIRECTORS

Nominees for Election to the Board of Directors

The following are the nominees for election to the Board of the Corporation:

Name of Director	Biography
Matthew W. Barrett(2)(4) Director since January 15, 2008 Common Shares(1): Nil Stock Options:  Nil Deferred Share Units: 14,023 Value of Shares(6):  US$40,352	Matthew W. Barrett, age 64, of Oakville, Ontario, is the former Chairman and CEO of Barclays PLC. He began his career at the Bank of Montreal in 1962 and built a career at the bank where he held a variety of management positions in international banking and treasury during his 37 year tenure. He was appointed President and Chief Operating Officer in 1987. In 1989, he was appointed Chief Executive Officer and was named Chairman and Chief Executive Officer in 1990. In 1999, Mr. Barrett accepted the position of Group Chief Executive of Barclays Bank PLC and was appointed Chairman in 2004. Mr. Barrett was previously a member of the Federal Reserve Bank of New York International Advisory Committee and previously served on the board of directors of Molson, Inc., and Seagram Corporation.  He currently serves on the board of directors of Goldman Sachs Bank USA.  He is an officer of the Order of Canada.
Thomas M. Boehlert Director since April 2, 2009 Common Shares(1): Nil Stock Options:  Nil Deferred Share Units: Nil(5) Value of Shares(6):  N/A	Thomas M. Boehlert, age 49, of Toronto, Ontario, Canada, is currently Executive Vice President and Chief Financial Officer of Kinross Gold Corporation and has held such positions since April of 2006.  In February of 2005, Mr. Boehlert was appointed the Executive Vice President and Chief Financial Officer of Texas Genco of Houston, an independent electric power company.  From January of 2004 until February of 2005, Mr. Boehlert was the Executive Vice President and Chief Financial Officer of Direct Energy of Toronto, a North American energy services company.  Prior to that he was Senior Vice President and Chief Financial Officer of Sithe Energies of New York, an international independent electric power company. Mr. Boehlert spent 14 years as a banker at Credit Suisse in New York and London where he was responsible for covering energy companies and project finance activities.   He began his career as an auditor at KPMG in New York.  Mr. Boehlert holds a Bachelor of Arts in Accounting from Indiana University, an MBA, Finance from New York University and is a certified public accountant.
Micheline Bouchard(3)(4) Director since January 15, 2008 Common Shares(1): Nil Stock Options:  Nil Deferred Share Units: 13,790 Value of Shares(6):  US$39,681	Micheline Bouchard, age 61, of Montreal, Quebec, Canada, is the former President and Chief Executive Officer of ART Advanced Research Technologies, a biomedical company based in Montreal. Prior to that, Ms. Bouchard was Global Corporate Vice-President of Motorola Inc. in the US after serving as President and Chief Executive Officer of Motorola Canada in Toronto. In addition, Ms. Bouchard served as a Vice President of business development Canada and Vice President of Quebec operations during her tenure at Hewlett-Packard Canada, Ltd. She holds a Bachelor's degree in Engineering Physics and a Master's Degree in  Electrical Engineering, both from Polytechnique, Montreal. She currently serves on the board of directors of Telus Corporation, Citadel Group of Funds and Home Capital/Home Trust. She is a member of the Order of Canada.

9

Name of Director	Biography
Robert A. Gannicott Chairman and Chief Executive Officer Director since June 19, 1992 Common Shares(1):  759,720 Stock Options:  964,330 Value of Shares(6):  US$2,186,115 Value of Options(7):  US$0	Robert A. Gannicott, age 61, of Toronto, Ontario, Canada, was appointed the President and Chief Executive Officer of the Corporation in September 1999.  Upon the appointment of Mr. O'Neill as President on April 15, 2004, Mr. Gannicott continued his duties as Chief Executive Officer and was appointed Chairman of the Board on June 22, 2004.  A geologist, Mr. Gannicott has worked extensively in the Northwest Territories and in Greenland.
Noel Harwerth(2)(4) Director since June 4, 2008 Common Shares(1): Nil Stock Options:  Nil Deferred Share Units: 5,745 Value of Shares(6):  US$16,531	Noel Harwerth, age 61, of London, England, served as Chief Operating Officer of Citibank International PLC from 1998 to 2003.  Prior to that, she served as Chief Tax Officer of Citigroup, Dun & Bradstreet Corporation and Kennecott Copper Corporation.  She holds a Jurisdoctor degree from the University of Texas Law School.  She currently serves on the board of directors of Royal & Sun Alliance Insurance, Logica Group, Corporate Services Group and is Deputy Chairman of Sumitomo Mitsubishi Banking Europe. Mrs. Harwerth was appointed by the U.K. Government to the Horserace Totalisator Board.
Daniel Jarvis(2)(3) Director since June 4, 2008 Common Shares(1): 1,000 Stock Options:  Nil Deferred Share Units: 8,581 Value of Shares(6):  US$27,570	Daniel Jarvis, age 58, of Vancouver, British Columbia, Canada, currently manages a real estate advisory and investment firm. Mr. Jarvis joined Intrawest Corporation as Executive Vice-President and Chief Financial Officer in 1989.  During his term, he took the company public in 1990 and acquired numerous resorts and other recreational assets.  He served in senior executive roles with the company until it was acquired in 2006 by Fortress Canada Investment Corporation.  Prior to Intrawest, Mr. Jarvis was Chief Financial Officer of BCE Development Corporation from 1986 to 1989 and Treasurer of BCE Inc. from 1983 to 1986.  He holds a Bachelor's degree in Economics from Queen’s University and an MBA from Harvard University.
Laurent E. Mommeja(3) Director since June 22, 2004 Common Shares: (1)  Nil Stock Options: Nil Deferred Share Units: 7,489 Value of Shares(6):  US$21,550	Laurent E. Mommeja, age 52, of Paris, France, is Managing Director of Hermès Maison and  President of  La Compagnie des Arts de la Table, a subsidiary of Hermès International. He is in charge of the development of Hermès Maison, Hermès Tableware,  Puiforcat Silversmith and Saint-Louis Crystal. He has had assignments in different countries in his 28 years with Hermès.  Previously, he was the Europe and Middle East Director of Hermès International.  Prior to that, Mr. Mommeja lived in the United States for 14 years where his last assignment was President and CEO of Hermès Paris Inc., the US subsidiary of Hermès International.
Thomas J. O'Neill President Director since July 22, 2002 Common Shares(1):  Nil Stock Options:  135,000 Value of Options(7):  US$0	Thomas J. O’Neill, age 56, of Paris, France, was appointed the President of the Corporation and Chief Executive Officer of the Corporation's subsidiaries, Harry Winston, Inc. and H.W. Holdings, Inc., on April 15, 2004. Prior to his appointment, Mr. O'Neill was a director and President Worldwide, Burberry Group plc, a British retailer and luxury goods company. Mr. O’Neill's career in luxury retailing includes senior executive positions with Tiffany & Co, Louis Vuitton and LVMH.  He is a director of C & J Clark Limited, U.K.

10

Name of Director	Biography
J. Roger B. Phillimore Director since November 17, 1994 Common Shares:  25,000 Stock Options:  90,000 Deferred Share Units: 36,326 Value of Shares(6):  US$176,467 Value of Options(7):  US$0	J. Roger B. Phillimore, age 59, of London, England, is a corporate director and advisor to companies primarily in the natural resource industry. He is the Chairman of Lonmin plc, a mining corporation based in Britain.  Prior to 1993, he was Joint Managing Director of Minorco S.A.

(1)

“Common Shares” refers to the number of Common Shares of the Corporation owned by each nominee for election as director and includes all Common Shares beneficially owned, directly or indirectly, or over which such nominee exercised control or direction. Such information, not being within the knowledge of the Corporation, has been furnished by the respective directors individually.

(2)

Member of the Audit Committee.

(3)

Member of the Human Resources & Compensation Committee.

(4)

Member of the Nominating & Corporate Governance Committee.

(5)

Thomas M. Boehlert was appointed as a director on April 2, 2009.  In accordance with instructions from Mr. Boehlert, his employer Kinross Gold Corporation was granted the 2,500 DSUs that would have otherwise been granted to Mr. Boehlert personally in accordance with the current director compensation package (see “Director Compensation Table” below).

(6)

“Value of Shares” represents the total market value of the Common Shares and deferred share units (“DSUs”) held by each nominee.  Value is determined by multiplying the number of Common Shares and DSUs held by each nominee as of March 31, 2009 by the closing price of the Corporation’s Common Shares on the TSX on such date (Cdn$3.63) (in this section the “Closing Price”), converted at the March Exchange Rate.

(7)

“Value of Options” represents the total market value of the unexercised stock options held by each nominee.  The value is determined by multiplying the number of unexercised options held by each nominee as of March 31, 2009 by the difference between the Closing Price on the TSX and the exercise price of such options, converted at the March Exchange Rate.

Director Compensation Table

The Corporation's policy with respect to directors' compensation was developed by the Nominating & Corporate Governance Committee with reference to comparative data and guidance from the Corporation's compensation consultants.  The directors’ compensation, currently payable in four equal quarterly installments, for Fiscal 2009 was as follows:

• Cash retainer of Cdn$60,000, all or portions of 25%, 50% or 75% of which, at the election of a director, may be taken in the form of DSUs (see “Deferred Share Unit Plan” on page 13)

• Annual Chairman's retainer for Audit Committee of Cdn$15,000, and annual Chairman's retainer for other committees of Cdn$5,000

• Initial grant of 2,500 DSUs

• Annual grant of 1,500 DSUs

• Meeting fees of Cdn$1,500 for Board and Committee meetings, with an additional Cdn$1,500 for directors traveling from outside the province, in the case of meetings in Ontario, or directors required to travel to meetings outside Ontario and outside their place of residence

• Reimbursement of meeting expenses

The directors’ compensation was thoroughly reviewed on April 5, 2004 and was, at that time, instituted essentially in the same form as it exists today, with the exception of the initial and annual DSU grants which were increased by 500 on January 16, 2007.  At the time of the review of directors’ compensation, the value of a DSU was approximately Cdn$41.20 and at the time of the quarterly grants in Fiscal 2009 averaged approximately Cdn$22.02.  Accordingly, the directors’ compensation has declined since its institution in 2004.

11

The following table sets forth the compensation awarded, paid to or earned by the directors of the Corporation during the most recently completed fiscal year ended January 31, 2009 (“Fiscal 2009”).  Thomas M. Boehlert was appointed a director on April 2, 2009, and accordingly, did not receive any director compensation in Fiscal 2009.  Directors of the Corporation that are also officers or employees of the Corporation are not compensated for service on the Board.  Therefore no fees are payable to Robert A. Gannicott and Thomas J. O’Neill for their services as directors of the Corporation.

Name	Fees Earned (US$)(5)	Share-Based Awards (US$)(6)	Option-Based Awards (US$)	Non-Equity Incentive Plan Compensation (US$)	Pension Value (US$)	All Other Compensation (US$)	Total (US$)
Matthew W. Barrett	94,770	31,912	Nil	Nil	Nil	Nil	126,682
Micheline Bouchard	89,236	31,912	Nil	Nil	Nil	Nil	121,148
Noel Harwerth(1)	60,874	94,590	Nil	Nil	Nil	Nil	155,464
Daniel Jarvis(1)	72,634	94,590	Nil	Nil	Nil	Nil	167,224
Lars-Eric Johansson(2)	29,054	20,670	Nil	Nil	Nil	Nil	49,724
Lyndon Lea(3)	49,806	28,254	Nil	Nil	Nil	Nil	78,060
Laurent E. Mommeja	76,093	31,912	Nil	Nil	Nil	Nil	108,005
J. Roger B. Phillimore(4)	73,326	31,912	Nil	Nil	Nil	253,643	358,881
John M. Willson(2)	43,350	20,670	Nil	Nil	Nil	Nil	64,020

(1)

Elected to the Board on June 4, 2008.

(2)

Messrs. Johansson and Willson did not stand for re-election at the annual and special meeting of shareholders held on June 4, 2008.

(3)

Mr. Lea resigned from the Board on October 31, 2008.

(4)

In addition to his regular director's compensation, J. Roger B. Phillimore was paid Cdn$275,000 (converted at the Average Exchange Rate) during the fiscal year in respect of consulting services related to mining, marketing, financing and new business ventures in accordance with a consulting agreement dated September 1, 1999.  The consulting agreement automatically terminates upon Mr. Phillimore’s death, and may be terminated by Mr. Phillimore upon 30 days written notice.  It may be terminated by the Corporation:  (a) with cause upon notice and without further compensation (cause being: (i) failure to cure any material default under the agreement or a material breach; and (ii) Mr. Phillimore’s mental or physical incapacity); and (b) without cause upon payment of Cdn$75,000 to Mr. Phillimore.

(5)

Fees Earned are converted at the Average Exchange Rate.

(6)

Represents value of DSUs awarded converted at the Quarterly Exchange Rate and for initial grants to new Board members elected on June 4, 2008 converted at the Exchange Rate on June 3, 2008 of $0.9915.

The breakdown of the Fees Earned and the Share-Based Awards for the non-executive directors is as follows (all amounts converted to US dollars using the Average Exchange Rate):

Directors	Board Retainer	Committee Chair Retainer	Board Meeting Fees	Committee Meeting Fees	Travel Fees	% and Value of Retainer & Meeting Fees Taken in DSUs		Total Fees Earned
	(US$)	(US$)	(US$)	(US$)	(US$)	%	(US$)	(US$)
Matthew W. Barrett	55,340	10,376	12,452	8,301	8,301	100%	94,770	94,770
Micheline Bouchard	55,340	3,459	12,452	11,068	6,918	100%	89,236	89,236
Noel Harwerth	41,505	-	6,918	5,534	6,918	25%	15,219	60,874
Daniel Jarvis	41,505	10,376	6,918	6,918	6,918	50%	36,317	72,634
Lars-Eric Johansson	27,670	-	1,384	-	-	100%	29,054	29,054
Lyndon Lea	41,505	-	4,151	1,384	2,767	100%	49,806	49,806
Laurent E. Mommeja	55,340	-	9,685	6,918	4,150	0%	-	76,093
J. Roger B. Phillimore	55,340	-	11,068	-	6,918	100%	73,326	73,326
John M. Willson	27,670	4,612	4,151	5,534	1,384	50%	21,675	43,350

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Deferred Share Unit Plan

Effective as of February 1, 2004, the Corporation adopted a Deferred Share Unit Plan (the “DSU Plan”) for its directors. During Fiscal 2009, non-executive directors received an annual grant of 1,500 DSUs under the DSU Plan.  Non-executive directors receive an initial grant of 2,500 DSUs when they are first appointed to the Board, and an annual grant of 1,500 DSUs, both payable quarterly.  DSUs granted under the DSU Plan vest immediately, but are only redeemable upon retirement from the Board, or upon death. Directors may also elect to take all or a portion of their annual retainer and meeting fees in the form of DSUs. When a dividend is paid on the Corporation’s Common Shares, each director’s DSU account is allocated additional DSUs equal in value to the dividend paid on an equivalent number of the Corporation’s Common Shares. The value of the DSUs credited to a director is payable after he or she ceases to serve as a director of the Corporation. The value is calculated by multiplying the number of DSUs in the director’s account by the market value of a Common Share of the Corporation at the time of payment. With the introduction of the DSU Plan, a decision was made to discontinue stock option grants to the non-executive directors.

Share Ownership Guidelines

The Corporation has adopted share ownership guidelines for directors, which require each director to own Common Shares of the Corporation, or hold awarded DSUs, having an aggregate cost basis of Cdn$200,000 within five years of joining the Board.  All of the directors have complied, or are in the process of complying, with the share ownership guidelines.

Incentive Plan Awards

Outstanding Share-Based Awards and Option-Based Awards

	Option-Based Awards				Share-Based Awards
Name	Number of Securities Underlying Unexercised Options (#)	Option Exercise Price (Cdn$)	Option Expiration Date (M/D/Y)	Value of Unexercised In-the-Money Options (US$)(1)	Number of Shares or Units of Shares that Have Not Vested (#)	Market or Payout Value of Share-Based Awards that Have Not Vested (US$)
Matthew W. Barrett	Nil	N/A	N/A	N/A	Nil	Nil
Micheline Bouchard	Nil	N/A	N/A	N/A	Nil	Nil
Noel Harwerth	Nil	N/A	N/A	N/A	Nil	Nil
Daniel Jarvis	Nil	N/A	N/A	N/A	Nil	Nil
Lyndon Lea	Nil	N/A	N/A	N/A	Nil	Nil
Laurent E. Mommeja	Nil	N/A	N/A	N/A	Nil	Nil
J. Roger B. Phillimore	65,000 25,000	23.35 26.45	02/05/2012 04/172013	Nil Nil	Nil	Nil
John M. Willson	Nil	N/A	N/A	N/A	Nil	Nil

(1)

Based on the last trade of the Common Shares on the TSX prior to the close of business on January 30, 2009, of Cdn$4.88.

13

Incentive Plan Awards – Value Vested or Earned During the Year

Name	Option-Based Awards – Value Vested During the Year (US$)	Share-Based Awards – Value Vested During the Year (US$)(1)	Non-Equity Incentive Plan Compensation – Value Earned During the Year (US$)
Matthew W. Barrett	Nil	31,912	Nil
Micheline Bouchard	Nil	31,912	Nil
Noel Harwerth	Nil	94,590	Nil
Daniel Jarvis	Nil	94,590	Nil
Lars-Eric Johansson	Nil	20,670	Nil
Lyndon Lea	Nil	28,254	Nil
Laurent E. Mommeja	Nil	31,912	Nil
J. Roger B. Phillimore	Nil	31,912	Nil
John M. Willson	Nil	20,670	Nil

(1)

These amounts represent the annual grants of DSUs converted at the Quarterly Exchange Rate, and do not include director compensation the directors have elected to take in the form of DSUs.

Meetings Held and Attendance of Directors

The information presented below reflects meetings of the Board and Committees held and attendance of the directors proposed for election for Fiscal 2010.  Robert A. Gannicott, Chief Executive Officer of the Corporation, Thomas J. O’Neill, President of the Corporation, and J. Roger B. Phillimore, were not members of any of the Corporation's Committees during the year.   

Summary of Board and Committee Meetings Held  

	Scheduled Meetings	Unscheduled Meetings (called on short notice)	Total
Board of Directors	7	2	9
Audit Committee	5	1	6
Nominating & Corporate Governance Committee	2	1	3
Human Resources & Compensation Committee	4	0	4

Summary of Attendance of Directors

		Committee Meetings Attended
	Board Meetings Attended	Audit(1)	Nominating & Corporate Governance(2)	Human Resources & Compensation(3)
Matthew W. Barrett	9 of 9	6 of 6	2 of 2	N/A
Thomas M. Boehlert(4)	N/A	N/A	N/A	N/A
Micheline Bouchard	9 of 9	4 of 4	3 of 3	3 of 3
Robert A. Gannicott	9 of 9	N/A	N/A	N/A
Noel Harwerth(5)	5 of 5	2 of 2	2 of 2	N/A
Daniel Jarvis(5)	5 of 5	2 of 2	N/A	3 of 3
Laurent E. Mommeja	7 of 9	3 of 4	N/A	4 of 4
Thomas J. O’Neill	9 of 9	N/A	N/A	N/A
J. Roger B. Phillimore	8 of 9	N/A	N/A	N/A

(1)

Mr. Barrett was a member of the Audit Committee for the full year, Mr. Mommeja and Ms. Bouchard were members from January 31, 2008 to June 4, 2008 and Mr. Jarvis and Ms. Harwerth were appointed to the Audit Committee effective June 4, 2008.

(2)

Ms. Bouchard was a member of the Nominating & Corporate Governance for the full year, and Mr. Barrett and Ms. Harwerth were appointed to the Nominating & Corporate Governance Committee on June 4, 2008.

(3)

Mr. Mommeja was a member of the Human Resources & Compensation Committee for the full year, Mr. Lea was a member from January 31, 2008 to June 4, 2008 and Ms. Bouchard and Mr. Jarvis were appointed to the Human Resources & Compensation Committee on June 4, 2008.

(4)

Appointed to the Board on April 2, 2009.

(5)

Appointed to the Board on June 4, 2008.

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Directors’ and Officer’s Liability Insurance

The Corporation maintains a directors' and officers' liability insurance program with a total limit of US$60,000,000 that is subject to deductibles between US$100,000 and US$500,000.  The policy is renewed annually. The current policy has an annual premium of US$667,990 and expires September 30, 2009.

The policy provides protection to directors and officers against liability incurred by them in their capacities as directors and officers of the Corporation and its subsidiaries. The policy also provides protection to the Corporation for claims made against directors and officers for whom the Corporation has granted directors and officers indemnity, as is required or permitted under applicable statutory or by-law provisions.

CORPORATE GOVERNANCE DISCLOSURE

The Corporation is listed on the TSX and on the New York Stock Exchange (the “NYSE”).  The Corporation is required to comply with the Sarbanes-Oxley Act of 2002, the rules adopted by the United States Securities and Exchange Commission (“SEC”) pursuant to that Act, and the NYSE corporate governance rules as they apply to foreign private issuers. The Canadian Securities Administrators (“CSA”) has also adopted rules relating to audit committees and disclosure of corporate governance practices under National Instrument 52-110 – Audit Committees (“NI52-110”) and National Instrument 58-101 –Disclosure of Corporate Governance Practices (“NI58-101”).

The Corporation has complied with Section 5.1 of NI52-110, and the disclosure required by Form 52-110F1 is included in the Corporation’s Annual Information Form under Item 8 – Audit Committee.

The Corporation has amended its governance practice as regulatory changes have come into effect in recent years and will continue to follow regulatory changes and consider amendments to its governance practices as appropriate.  The disclosure required pursuant to Form 58-101F1 of NI58-101 is set out in Schedule 1 of this Management Proxy Circular.

REPORT OF THE AUDIT COMMITTEE

The Audit Committee is appointed by the Board to assist the Board in fulfilling its oversight responsibilities with respect to the integrity of financial statements, compliance with legal and regulatory requirements, the qualifications and independence of the external auditors and the performance of the internal audit function and external auditors.

In December of 2008, the Audit Committee and the Nominating & Corporate Governance Committee reviewed the Audit Committee Charter and made recommendations to update it in accordance with best practices and with applicable laws and rules of the stock exchanges on which the Corporation's securities are listed.  These recommendations were approved by the Audit Committee on December 10, 2008, and by the Nominating & Corporate Governance Committee on January 14, 2009.  The Charter is attached as Appendix 1 to the Corporation’s Annual Information Form, and is available on the Corporation's website.

15

To assist in the timely fulfillment of its Charter, the Audit Committee approved a detailed Work Plan for the fiscal year. The Work Plan prescribed actions to be taken at each of the scheduled meetings of the Committee. In the course of following the Work Plan, the Committee:

●

reviewed with management and the external auditors the Corporation’s Quarterly and Annual Financial Statements and Management’s Discussion and Analysis. The Committee approved the Corporation’s Quarterly Financial Statements and accompanying Management’s Discussion and Analysis, and approved and recommended for approval by the Board the Annual Financial Statement and Annual Management’s Discussion and Analysis. The Committee concluded that these documents were complete, and fairly presented in accordance with generally accepted accounting principals that were consistently applied;

●

arranged for and reviewed the reports provided to the Committee by management and the external auditors on the Corporation’s internal control environment as it pertains to the Corporation’s financial reporting process and controls;

●

reviewed and discussed significant financial risks or exposures and assessed the steps management had taken to monitor, control, report and mitigate such risks to the Corporation;

●

reviewed the effectiveness of the overall process for identifying the principal risks affecting the achievement of business plans, and provided the Committee’s view to the Board;

●

reviewed legal and regulatory matters that could have a material impact on the interim or annual financial statements, related corporation compliance policies, and programs and reports received from regulators or governmental agencies;

●

reviewed policies and practices with respect to hedging activities;

●

met on a regular basis with the external auditors without management present, and arranged for the external auditors to be available to attend Committee meetings;

●

reviewed and discussed with the external auditors all significant relationships that the external auditors and their affiliates had with the Corporation and its affiliates in order to determine the external auditors’ independence;

●

reviewed and evaluated the performance of the external auditors and the lead partner of the external auditors’ team, made a recommendation to the Board regarding the reappointment of the external auditors at the annual meeting of the Corporation’s shareholders, the terms of engagement of the external auditors, together with their proposed fees, external audit plans and results, and the engagement of the external auditors to perform non-audit services, together with the fees therefor, and the impact thereof, on the independence of the external auditors; and

●

reviewed the Internal Audit Department Charter and submitted it to the Nominating & Corporate Governance Committee for approval.

The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2009.

On behalf of the members of the Audit Committee:  Daniel Jarvis (Chair), Matthew W. Barrett and Noel Harwerth.

REPORT OF THE HUMAN RESOURCES & COMPENSATION COMMITTEE

The primary functions of the Human Resources & Compensation Committee are to assist the Board in carrying out its responsibilities by reviewing compensation and human resources issues and to make recommendations to the Board as appropriate.

In 2009, the Human Resources & Compensation Committee and the Nominating & Corporate Governance Committee reviewed the Human Resources & Compensation Committee Charter and made recommendations to update it in accordance with best practices and with applicable laws and rules of the stock exchanges on which the Corporation's securities are listed.  These recommendations were approved by the Human Resources & Compensation Committee and the Nominating & Corporate Governance Committee on January 14, 2009.  The Charter is available on the Corporation's website.

16

To assist in the timely fulfillment of its Charter, the Human Resources & Compensation Committee approved a detailed Work Plan for Fiscal 2009.  The Work Plan prescribed actions to be taken at each of the scheduled meetings of the Committee. In the course of following the Work Plan, the Committee:

●

reviewed and submitted to the Board:

●

the Corporation’s overall executive compensation strategy;

●

the corporate compensation plan and benefit plans including proposed salary ranges, merit increases, annual incentive bonuses, stock options, Restricted Share Units, long term incentive plan and any other form of compensation;

●

the Chief Executive Officer’s recommendation for salaries, annual incentive bonuses, budgets, organization and manpower plans, and succession planning for the Chief Executive Officer, the President and their direct reports;

●

performance appraisals and overall compensation as recommended by the Chief Executive Officer and the President for senior officers earning in excess of Cdn$250,000;

●

after consultation with the Chief Executive Officer, the appointment of new officers;

●

the objectives and compensation of the Chief Executive Officer;

●

the consultant’s performance and re-appointment;

●

the framework for the balanced scorecard for fiscal 2010 for determining the short term incentive program for the Chief Executive Office, the President and their direct reports;

●

approved and reported to the Board the terms of employment contracts with senior management, including termination benefits;

●

approved its report for disclosure in the Management Proxy Circular on Executive Compensation;

●

reviewed and assessed management development programs to enhance individual effectiveness and preparedness for greater responsibilities; and

●

reviewed its performance, and reported to the Board thereon.

The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2009.

On behalf of the members of Human Resources & Compensation Committee:  Micheline Bouchard (Chair), Daniel Jarvis and Laurent E. Mommeja.

REPORT OF THE NOMINATING & CORPORATE GOVERNANCE COMMITTEE

The mandate of the Nominating & Corporate Governance Committee is to manage the corporate governance system for the Board, to assist the Board in fulfilling its duty to meet the applicable legal, regulatory and self-regulatory business principles and codes of best practice of corporate behaviour and conduct and to recommend to the Board the director nominees to be put before the shareholders at each annual meeting.

In 2008, the name of the Corporate Governance Committee was changed to the Nominating & Corporate Governance Committee.  In 2009, the members of the Nominating & Corporate Governance Committee reviewed its Charter and made recommendations to update it in accordance with best practices and with applicable laws and rules of the stock exchanges on which the Corporation's securities are listed.  These recommendations were approved by the Board on January 15, 2009.  The Charter is available on the Corporation's website.

To assist in the timely fulfillment of its Charter, the Nominating & Corporate Governance Committee approved a detailed Work Plan for the fiscal year. The Work Plan prescribed actions to be taken at each of the scheduled meetings of the Committee. In the course of following the Work Plan, the Committee:

●

developed and recommended to the Board a corporate governance system and monitored the effectiveness of the corporate governance system regularly and recommended changes to the Board;

●

reviewed the relationship between management and the Board and recommended changes to the Board;

●

reviewed polices governing Board size, composition, selection criteria, nominating process, succession planning and retirement age;

●

reviewed director compensation and made recommendations to the Board;

17

●

developed, reviewed and approved:

●

Charter for the Audit Committee;

●

Charter for the Human Resources & Compensation Committee;

●

Internal Audit Department Charter;

●

Guidelines and responsibilities for the Board of Directors;

●

Guidelines and responsibilities for the Lead Director of the Board;

●

Guidelines and responsibilities for the Chairman of the Board and Chief Executive Officer;

●

Corporate Governance Guidelines;

●

Mandate/Position description for the Committee Chairs;

●

Policy on Corporate Disclosure, Confidentiality and Employee Trading;

●

Insider Trading Policy;

●

Corporate Security Policy;

●

Whistleblower Protection Policy; and

●

Code of Ethics and Business Conduct;

●

reviewed the DSU policy and awarded DSUs;

oversaw evaluation of management, including the Chief Executive Officer;

●

prepared for disclosure to shareholders a report which describes the Corporation’s governance practices;

●

identified individuals qualified to become new directors and recommended to the Board new nominees for election by shareholders based on selection criteria and individual characteristics;

●

recommended to the Board the allocation and removal of Board members to the various Committees of the Board;

●

reviewed, approved and reported to the Board on directors and officers insurance;

●

oversaw the evaluation of the Board by considering the effectiveness of the Board as a whole, the Committees of the Board and the contribution of individual members;

●

reviewed any significant ethics related contraventions of regulation or policies;

●

determined orientation and education programs for new Board members and continued development of all members of the Board; and

●

reviewed its performance, and reported to the Board thereon.

The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2009.

On behalf of the members of the Nominating & Corporate Governance Committee:  Matthew W. Barrett (Chair), Micheline Bouchard and Noel Harwerth.

STATEMENT OF EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The following Compensation Discussion and Analysis describes and explains the significant elements of the Corporation’s compensation programs, with particular emphasis on the process for determining compensation payable to the Chief Executive Officer, Chief Financial Officer, and the three most highly compensated executive officers (other than the Chief Executive Officer and Chief Financial Officer), at the end of the most recently completed financial year (collectively, the “Named Executive Officers”).

18

Objectives of Compensation Programs

The objectives of the Corporation’s compensation programs are to attract, retain and motivate highly qualified executive officers who will drive the success of the Corporation, while at the same time promoting a greater alignment of interests between such executive officers and the Corporation’s shareholders. The Corporation’s compensation programs are designed to recruit and retain key individuals and reward individual and company performance with compensation that has mid and long-term growth potential, while recognizing that the executives work as a team to achieve corporate results.

Elements of Compensation

Compensation is comprised of five main components: base salary, annual bonus incentive, mid-term incentive, long-term incentive and benefits.  The Human Resources & Compensation Committee annually reviews each component and relevant competitive factors and makes recommendations based on corporate and individual performance, taking into account leadership abilities, retention risk and succession plans.

1.

Base Salaries - The primary element of the Corporation’s compensation program is base salary. The Corporation’s view is that a competitive base salary is a necessary element for retaining qualified executive officers.  The amount payable to an executive officer as base salary is determined primarily by the number of years of experience, survey data and internal position comparisons, and, if available, comparisons to the base salaries offered by other companies in the same geographic location or in similar businesses and for comparable positions at other companies where the Corporation competes for talent based on available market data (see “Determination of Compensation” on page 21).

2.

Annual Bonus or Short Term Incentives - Along with the establishment of competitive base salaries and long-term incentives, one of the objectives of the executive compensation strategy is to encourage and recognize strong levels of performance by linking achievement of specific goals with variable cash compensation in the form of annual bonus or short term incentive awards.  Target bonus awards range from 30% to 100% of base salary for the executive group.  Actual bonus compensation for executive officers, other than the Chief Executive Officer and the President, is determined on the basis of an overall assessment nominally based on 50% corporate, 25% business unit and 25% individual performance.  The Human Resources & Compensation Committee, and the Chief Executive Officer agreed that the percent of the target bonus to be awarded to the Chief Executive Officer, would be driven by the degree to which the Corporation achieved specified mining and ret ail segment and consolidated targets calculated on audited financial statements or other objective measures and individual performance as described in this Management Proxy Circular on page 22 (see “Performance Goals of Named Executive Officers”).  The President is contractually entitled to an annual bonus of 50% of his base salary.   

3.

Mid-term Incentives – RSUs - On April 5, 2004, the Corporation adopted the RSU Plan for employees under which executive officers and other employees of the Corporation and its subsidiaries may be granted restricted share units (“RSUs”) by the Human Resources & Compensation Committee.  The objective of the RSU Plan is to provide compensation opportunities that facilitate recruitment and retention and promote alignment of interest between employees and shareholders of the Corporation.  Under the RSU Plan, selected employees may receive an award of RSUs.  RSUs have been awarded to other employees as a result of recommendations from management based on company performance, the individual employee’s seniority within the Corporation, and the goal to have a compensation package competitive with market data.  When a dividend is paid on the Corporation’s Common Shares, each RSU account is allocated additional RSUs equal in value to the dividend paid on an equivalent number of the Corporation’s Common Shares.  The RSUs are time vested and redeemable on the settlement date determined by the Human Resources & Compensation Committee (generally three years from the date of grant) which may not end later than December 31^st of the third calendar year following the award date.  The vesting of RSUs can also occur in the case of death, retirement or change of control.  The redemption value for a RSU is the five day average closing price of a Common Share of the Corporation prior to the redemption date. In addition to the mid-term incentive grants of RSUs, the RSU Plan provides that selected employees may elect to receive up to 100% of the employee’s short-term incentive compensation in the form of RSUs.  These RSUs are vested at the time they are granted to the employee. In Fiscal 2009, the Corporation moved towards implementing a long term incentive plan utilizing stock options, and decided to di scontinue the use of RSUs.  Accordingly, no RSUs were awarded in Fiscal 2009, except for awards made to Messrs. O’Neill and Mayne in accordance with their respective employment contract (see Footnote No. 1 under “Summary Compensation Table” on page 25).

19

On March 16, 2006 the Corporation adopted a Linked Restricted Share Unit Plan which provided for the granting of Linked Restricted Share Units (“Linked RSUs”).  Linked RSUs were awarded only in 2006, and primarily to employees who are employed by the Corporation but also have responsibilities within Harry Winston, Inc. (the Corporation’s retail business), using the same guidelines as used in awarding RSUs.  Linked RSUs are RSUs with the number of RSUs ultimately paid out calculated by applying a multiple, representing the increase or decrease in the fair market value of Harry Winston, Inc., the Corporation’s wholly owned subsidiary, to the original number of Linked RSUs’ granted (adjusted for dividends paid).  All other features of the RSU Plan apply to the Linked RSUs.

4.

Long-Term Incentives

(a)

Stock Options - Prior to April, 2004, the Corporation relied on the grant of stock options to align management’s interest with shareholder value.  Grant ranges had been established independently each time grants of stock options were made to provide competitive long-term incentive value, with significant recognition of contribution and potential of the individual.  The options have a ten-year term and an exercise price equal to market price at the time of grant. With the introduction of the RSU Plan in April, 2004, significantly less reliance was placed on the grant of stock options as a form of incentive compensation.

The Corporation has implemented a Long Term Incentive Plan (“LTIP”) which sets out guidelines for granting stock options, based on the Corporation’s performance and economic conditions.  An annual grant will be made to the Named Executive Officers in two parts:  a fixed part and a performance based part.  The size of the performance based part of the grant is derived from historical performance of the Corporation measured against target.  The vesting schedule for the entire option grant would be one third vesting on the anniversary of each of the three years following the date of the grant.  The granting of stock options under the LTIP will commence in the current fiscal year.  No stock options were granted in Fiscal 2009.  Information regarding the Corporation’s LTIP can be found in this Management Proxy Circular on pages 28 to 30 (see “Securities Authorized for Issuance under Equity Compensation Plans”).  

(b)

Phantom Equity - Harry Winston, Inc. implemented a Phantom Stock Award Plan for certain key executives in 2004, prior to becoming a wholly owned subsidiary of the Corporation in 2006. The Phantom Stock Award is comprised of two parts, both payable in cash: 40% of the Award is a time vested portion (the “Time Vested Portion”) which vests on each of the third, fourth, fifth and sixth anniversaries of the executive’s first day of active employment with Harry Winston, Inc. or entry into the program, and 60% of the Award (the “Cliff Vested Portion”) vests on the date the Corporation acquires 100% of Harry Winston, Inc.  100% of the Award vests upon a change of control of Harry Winston, Inc. or the Corporation.  Cliff Vested Awards and awards vesting on a change in control are generally paid out over a period of one year after vesting.  In accordance with the Phantom Stock Award Plan, the Time Vested Portion, subject to a change in c ontrol, is paid out in two instalments; one being six months, and the other being twelve months, after the executive ceases to be an employee of the Corporation or Harry Winston, Inc.  The value of the Award for each executive is calculated as a percentage of return on investment, as defined in the agreements as the excess of the fair value of Harry Winston, Inc. at the date of calculation, over the fair value of Harry Winston, Inc. at April 2, 2004, adjusted for certain items as defined in the agreements. On September 29, 2006, the Corporation acquired 100% of Harry Winston, Inc. and, as a result, the Cliff Vested Portion (60% of the Awards) vested and, with the exception of Thomas J. O’Neill, has been paid to the executives.  Pursuant to his employment agreement, Mr. O’Neill elected to defer payment of his vested Award to August 1, 2010.  At January 31, 2009, the Corporation has recorded a liability of US$3,136,948 million relating to the Cliff Vested Portion of the Phantom Stock Award Plan in respect of Mr. O’Neill.  The Corporation has not made any accruals in respect of the Time Vested Portion of the Phantom Stock Award Plan for any of the executives who have not yet vested fully.  Messrs. O’Neill and Haumont are the only Named Executive Officers participating in the Phantom Stock Award Plan.  Mr. Haumont’s employment with Harry Winston, Inc. terminated on February 28, 2009 and the Time Vested Portion of the Phantom Stock Award to which he was entitled had no value on that date.  No Phantom Stock Awards have been made since 2006.  The Board does not contemplate granting any additional Phantom Stock Awards.

20

5.

Benefits – Benefits for the Named Executive Officers, including life insurance, health and dental plans, and short and long term disability plans, and 401 K plans in the US, are maintained at a level that is considered competitive and similar to what all employees receive.

Determination of Compensation

The Corporation’s policy for determining executive compensation is based on the following fundamental principles:

●

Management’s fundamental objective is to maximize long term shareholder value;

●

Equitable balance among internal peers;

●

Performance is an important determinant of pay for executive officers; and

●

Recruitment and retention of key employees.

In determining compensation for senior executives, the Corporation considers, if available, the compensation practices of companies that operate in similar industries and/or that are comparable in size and with whom the Corporation competes for executive talent.  This competitive information is provided by external consultants retained by the Corporation and by external survey data provided by the 2008 Compensation Data Bank General Industry Executive Database, the 2008 Compensation Data Bank Retail/Wholesale Executive Database, and Salary.com/ICR Surveys (who prepared the 2008 Luxury Goods Compensation Survey).  Subject to the discretion of the Human Resources & Compensation Committee and the Board, when planned results are achieved the Corporation seeks to position total compensation for its executives, including base salary and annual, mid-term and long-term incentives, competitively with market data for positions with equivalent responsibilities and scope.

The Human Resources & Compensation Committee engaged Hewitt Associates LLC as an independent consultant to provide the Committee with support on determining levels of executive compensation.  Hewitt Associates LLC provided such services for the fiscal periods of the Corporation commencing February 1, 2006, February 1, 2007, February 1, 2008 and February 1, 2009, including:

●

Compensation philosophy development;

●

Market data and other market intelligence;

●

Compensation plan design support;

●

Governance and regulatory practices/requirements input; and

●

Assistance in facilitating the management of executive compensation and the execution of the Committee’s mandate.

The decisions made by the Human Resources & Compensation Committee are the responsibility of the Committee and may reflect factors and considerations other than the information and recommendations of Hewitt Associates LLC.  

The Corporation paid Hewitt Associates LLC fees in the amount of US$43,907 (inclusive of GST and disbursements) for Fiscal 2009 in connection with the above-noted services.  Hewitt Associates LLC did not perform any other services for the Corporation during the foregoing fiscal periods.

21

Annual Base Salary Review

Each year management recommends a base salary budget increase based on a percent increase over the prior year’s base compensation.  The percent increase is derived from generally available public data on average base salary increases and confirmed with Hewitt Associates LLC.  The Board considers this budget when it reviews and approves the annual budget for the Corporation.  The actual percent increase for each employee may be more or less than the average budgetary percent increase, and is based on such factors as the employee’s performance, seniority level, equitable balance among internal peers, market comparisons and promotions.  The Board determines whether any increases to the base salary of the Chief Executive Officer is appropriate, based on recommendations from the Human Resources & Compensation Committee.  The Human Resources & Compensation Committee determines whether any increases to the base salary of the other Named Executive Officers is appropriate.

For Fiscal 2009, a base salary increase of 5.2% was awarded to the Chief Executive Officer, and base salary increases of 3.8% on average were awarded for the balance of the Named Executive Officers.

For the fiscal years 2007, 2008 and 2009, the Human Resources & Compensation Committee decided that the performance of the Chief Executive Officer in the prior year, and the significant responsibility placed on the Chief Executive Officer in the current year, warranted an increase in excess of the budget.  

For Fiscal 2010, management recommended, and the Human Resources & Compensation Committee agreed, that there should not be increases to base salary throughout the Corporation, other than for minor exceptions for subsidiaries outside North America.  

Performance Goals of Named Executive Officers

Performance goals of the Named Executive Officers apply in determining base salary increases, short-term bonus awards, and the quantum of stock option awards. These goals are subjective and, therefore, subject to discretion by the Human Resources & Compensation Committee and the Board.

1.

Chief Executive Officer - The Chief Executive Officer's target bonus opportunity is 100% of his base salary. The individual performance of the Chief Executive Officer is measured against the goals, objectives and standards set annually between the Chief Executive Officer and the Human Resources & Compensation Committee, which are used as metrics in establishing the amount of the bonus to be awarded.  The metrics used for the Chief Executive Officer are based on the results of the mining and  retail parts of the business separately, combined company metrics and personal targets, each with different weighting  Metrics include the degree of achieving diamond prices and retail sales and earnings in excess of plan, cost management and funding corporate operations and capital requirement costs effectively. The bonus for the Chief Executive Officer may be adjusted up or down from his target bonus, based on achievement of the metrics.  The mini mum bonus award would be zero and the maximum would be 150% of target.  

By applying the metrics as weighted, the Chief Executive Officer would have been entitled to a substantial portion of his target bonus in respect of Fiscal 2009. However, in light of the economic financial crisis and its impact on the Corporation as a whole and its shareholders, the Chief Executive Officer recommended to the Human Resources & Compensation Committee that his, and all other employees of the Corporation, Fiscal 2009 bonus be capped at 50% of target.

The Chief Executive Officer did not receive grants of RSUs or stock options in Fiscal 2009.

No pension is currently payable to the Chief Executive Officer upon retirement.

2.

President  - The President has a contractual annual bonus of 50% of his base salary.

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3.

Other NEOs - Target bonus awards range from 30% to 50% of base salary for the executive group.  Actual bonus compensation is determined on the basis of an overall assessment nominally based on 50% corporate, 25% business unit and 25% individual performance.  The corporate performance metric is SG&A versus target, and the mining and retail metrics were the same as for the Chief Executive Officer but with a different weighting.  The individual performance metric is determined following an appraisal of the individual on such core competencies as communications, relationships, organization, management, leadership, timeliness, problem solving and knowledge.

Target bonus opportunity for Mr. Mayne is 50% of his base salary.  Target bonus opportunity for Mr. Pounds is 40% of his base salary.  Both Mr. Mayne and Mr. Pounds were measured on the same metrics for corporate and business unit objectives.  Application of the metrics would have resulted in a close to target bonus.  However, the Human Resources & Compensation Committee, after considering the Chief Executive Officer’s recommendation and the financial year end results, applied a cap of 50% of target bonus for Fiscal 2009 in line with the cap on the Chief Executive Officer’s bonus.

Target bonus opportunity for Mr. Haumont is 40% of his base salary.   Mr. Haumont was responsible for the retail salons in the United States (except for New York), Greater China and London.  The business unit metrics Mr. Haumont is measured on are total annual sales versus plan, total annual net income versus plan and inventory turn versus plan for the retail salons within his jurisdiction.  Application of the metrics resulted in a substantial reduction to target bonus.  

Change of Control

The selection of the events that trigger payment to a Named Executive Officer in the event of a change of control are negotiated and documented in each employment contract, with the attempt to balance the protection of the employee upon a change of control with the preservation of the executive base in the event such a change of control occurs.  As noted on page 27 under the heading “Termination and Change of Control Benefits”, there are certain circumstances that trigger payment, vesting of stock options or RSUs, or the provision of other benefits to a Named Executive Officer upon termination and change of control.

23

Performance Graph

The following graph compares the yearly percentage change in the Corporation's cumulative total shareholder return on its Common Shares with the cumulative total return of the S&P/TSX Composite Index (assuming reinvestment of dividends and considering a $100 investment in Common Shares on January 31, 2004). For this purpose, the yearly change in the Corporation's cumulative total shareholder return is calculated by dividing the difference between the price for the Common Shares at the end and the beginning of the "measurement period" by the price for the Common Shares at the beginning of the measurement period.  "Measurement period" means the period beginning at the market close on the last trading day before the beginning of the Corporation's fifth preceding fiscal year, through and including the end of the Corporation's most recently completed fiscal year.

Cumulative Value of $100 Invested

	2004	2005	2006	2007	2008	2009
Harry Winston Diamond Corporation	$46.29	$40.72	$46.52	$45.35	$24.75	$4.88
Value of $100 Investment	$100.00	$87.97	$100.50	$97.97	$53.47	$10.54
S&P/TSX Composite	8,521.39	9,204.05	11,945.64	13,034.12	13,155.10	8,694.90
Value of $100 Investment	$100.00	$108.01	$140.18	$152.96	$154.38	$102.04

(1)  

All Dollars Amounts referenced in the performance graph are in Canadian Dollars.

Compensation includes base compensation, bonus, value of RSUs and dividend in kind on the RSUs, stock options and other compensation.  Compensation increased in 2004 with the addition of the retail executives following acquisition of the interest in Harry Winston, Inc.  From 2006, the increases in compensation were fairly flat with increases in base compensation reflective of market data.  The annual bonus is derived to a large extent on operating results which were not necessarily reflected in the share price.  The strong decline in share price was due in part to the reduction in dividend, a change in global economic circumstances and forward looking expectations on the Corporation’s performance taking into account factors that are not under the control of the Corporation such as diamond production, quality of rough diamonds and operating costs and capital expenditures of the Diavik Diamond Mine and does not accurately reflect operating results.  Long term and mi d term incentives were severely impacted by the decrease in share price.

24

Option-Based Awards

Information on option-based awards is discussed in this Management Proxy Circular on page 20 (see “Elements of Compensation – Long-term Incentives”).

Summary Compensation Table

The following table sets forth the compensation awarded, paid to or earned by the Named Executive Officers, during Fiscal 2009.

					Non-Equity Incentive Plan Compensation (US$)
Name and Principal Position	Year Ended January 31	Salary (US$)	Share-Based Awards (US$)(1)	Option- Based Awards (US$)	Annual Incentive Plans	Long-Term Incentive Plans	Pension Value (US$)	All Other Compensation (US$)(2)	Total Compensation (US$)
Robert A. Gannicott Chief Executive Officer	2009	922,339(3)	-	-	407,664(4)	-	-	1,116(3)	1,331,119
Alan S. Mayne Chief Financial Officer	2009	484,228(3)	19,386(5)	-	107,012(4)	-	-	828(3)	611,454
Thomas J. O’Neill President of the Corporation and Chief Executive Officer of Harry Winston, Inc.	2009	1,035,000	306,034(5)	-	517,500	-	-	8,611(3)	1,867,145
James Pounds Senior Vice-President Diamond Management	2009	534,034(3)	-	-	94,415 (4)	-	-	558(3)	629,007
Gilles Haumont Vice-President, New Product Development of Harry Winston, Inc.	2009	322,875	-	-	38,745	-	-	100,000	461,620

(1)

The amounts shown for Mr. O’Neill represent 10,000 RSUs granted to him each year pursuant to his employment agreement in his capacity as an executive (the “O’Neill Executive RSUs”) plus an annual award of RSUs equal to the number of DSUs granted to non-employee directors of the Corporation (the “O’Neill Director RSUs”). The value of these RSUs was determined based on a share price of Cdn$25.33 on February 1, 2008, the closing price of the Corporation’s common shares on the date of grant converted at the Year-Beginning Exchange Rate.  The amounts shown for Mr. Mayne represent 5,000 RSUs granted to him each year pursuant to his employment agreement.  The value of these RSUs was determined based on a share price of Cdn$4.94 on January 21, 2009, the closing price of the Corporation’s common shares on the date of grant converted at the January 21, 2009 Exchange Rate of 0.7849.    These RSUs vest and ar e paid out at the end of three years.    

The table below shows the number of RSUs outstanding for each Named Executive Officer, and their value at January 31, 2009 at the Year-End Exchange Rate.  Details of the RSU Plan can be found in this Management Proxy Circular on page 19 (see “Compensation Discussion and Analysis – Elements of Compensation – Mid-term Incentives”).

RESTRICTED SHARE UNITS OUTSTANDING AS OF JANUARY 31, 2009

Name	Number of Units	Value (US$)
Robert A. Gannicott	10,735	42,712
Alan Mayne	10,195	40,564
Thomas J. O’Neill	35,596	141,629
James Pounds	5,367	21,354
Gilles Haumont	-	-

The table below shows the number of RSUs granted in the fiscal year. The payout value will be based upon the 5 day average closing price of the Corporation’s Common Shares prior to the payout date, and will include accumulated dividend equivalents automatically credited.

RESTRICTED SHARE UNIT AWARDS GRANTED

Name	Units Granted	Period until Payout
Alan Mayne	5,000	3 years
Thomas J. O’Neill	12,013	3 years

(2)

The amounts shown represent the value of additional RSUs awarded based on nominal equivalents of dividends on the Corporation’s Common Shares, with the exception of Mr. Haumont which amount represents a housing allowance for him.  The amounts shown for Mr. O’Neill also include life insurance premiums in the amount of $4,920 paid for personal insurance for him.

(3)

Converted at the Average Exchange Rate.

(4)

Converted at the Year-End Exchange Rate.  

(5)

The Share-based awards represent RSUs granted.

25

Incentive Plan Awards

Outstanding Share-Based Awards and Option-Based Awards

	Option-Based Awards				Share-Based Awards(1)
Name	Number of Securities Underlying Unexercised Options (#)	Option Exercise Price (Cdn$)	Option Expiration Date (M/D/Y)	Value of Unexercised In-the-Money Options (US$)	Number of Shares or Units of Shares that Have Not Vested (#)	Market or Payout Value of Share-Based Awards that Have Not Vested (US$)
Robert A. Gannicott	15,000 256,400 11,250 286,680 200,000 110,000 100,000	10.60 9.15 9.10 12.45 23.35 41.45 26.45	02/01/2009 11/24/2009 03/14/2010 03/12/2011 02/05/2012 04/17/2013 04/07/2014	0 0 0 0 0 0 0	10,735	42,712
Alan S. Mayne	100,000	25.52	01/21/2018	0	10,195	40,564
Thomas J. O’Neill	30,000 5,000 100,000	25.51 26.45 41.95	07/22/2012 04/17/2013 09/8/2014	0 0 0	35,596	141,629
James Pounds	50,000 10,000	27.60 26.45	06/27/2012 04/17/2013	0 0	5,367	21,354
Gilles Haumont	Nil	N/A	N/A	N/A	N/A	N/A

(1)  

Share-based awards represent outstanding RSUs.  The payment value is based on the last trade of the Common Shares on the TSX prior to the close of business on January 30, 2009, of Cdn$4.88 converted at the Year End Exchange Rate.  

Incentive Plan Awards – Value Vested or Earned During the Year

Name	Option-Based Awards – Value Vested During the Year (US$)	Share-Based Awards – Value Vested During the Year (US$)	Non-Equity Incentive Plan Compensation – Value Earned During the Year (US$)
Robert A. Gannicott	Nil	858,209(1)	407,664(2)
Alan S. Mayne	Nil	Nil	107,012(2)
Thomas J. O’Neill	Nil	302,230	517,500
James Pounds	Nil	68,674(1)	94,415(2)
Gilles Haumont	Nil	Nil	38,745

(1)

These amounts represent Linked RSUs vested during Fiscal 2009 as further described in this Management Proxy Circular on page 19 (see “Elements of Compensation – Mid-term Incentives-RSUs”), converted at the Year-End Exchange Rate for Mr. Gannicott and the Exchange Rate at May 15, 2008 for Mr. Pounds of 1.0002.

(2)

These amounts represent bonuses declared for Fiscal 2009 as further described in this Management Proxy Circular on page 19 (see “Elements of Compensation – Annual Bonus or Short-term Incentive”) and on page 22 (see “Performance Goals of Named Executive Officers), converted at the Year-End Exchange Rate.

26

Pension Plan Benefits

No Named Executive Officer is a member of a Defined Pension Plan or a Defined Contribution Plan. Mr. O’Neill is a member of a Deferred Compensation Plan (see “Summary Compensation Table” on page 25).

Termination and Change of Control Benefits

The Corporation has executive employment agreements with Robert A. Gannicott, Thomas J. O’Neill, Alan S. Mayne, James Pounds and Gilles Haumont. The compensation set out in the Summary Compensation Table reflects the compensation levels contained in the various agreements, subject to periodic review by the Human Resources & Compensation Committee. The Corporation’s executive employment agreements generally provide, and it is the Corporation’s policy, that upon the executive’s termination of employment for any reason, the executive shall be entitled to receive his or her accrued salary and benefits, unpaid bonus, unpaid vacation pay, and, except as otherwise provided herein, vested portions of stock options, and any amounts credited to the vested phantom stock award and RSU accounts (collectively the “Basic Executives’ Termination Amounts”).  In addition, the executive employment agreements for each of Messrs. Gannicott, O’Neill, Mayne and Pounds obligate the Corporation to pay for existing benefit plan coverage for certain period of time:  Mr. Gannicott, 3 years; Mr. O’Neill, 1 year; and Messrs. Mayne and Pounds, 2 years.

Robert A. Gannicott’s executive employment agreement provides that if his employment is terminated without just cause, or if he elects to terminate the agreement within six months of a change in control, he will be entitled to receive: (a) a payment equal to three times his then current annual salary; and (b) an amount equal to three times the greater of: (i) his last year’s bonus; or (ii) the average of his bonuses for the last two fiscal periods.  

Thomas J. O’Neill’s executive employment agreement entitles him to deferred compensation (see “Summary Compensation Table” on page 25), a phantom stock award (see “Long Term Incentive – Phantom Equity” on page 20) and an annual award of RSUs (see “Summary Compensation Table” on page 25).  Mr. O’Neill can resign his employment for Good Reason (which is essentially any event which would constitute constructive dismissal at common law) after 180 days following his having given the Corporation notice of the event constituting Good Reason, provided the Corporation does not remedy the alleged violation within 30 days of Mr. O’Neill’s notice.  In addition, Mr. O’Neill shall have Good Reason to resign his employment following a change in control that occurs without his approval.  If Mr. O’Neill’s employment is terminated for any reason, he will be entitled to the balance of his deferred compensation.  In addition, his O’Neill Executive RSUs shall vest and the amount credited to his RSU account shall be paid to him.  Mr. O’Neill’s agreement provides that if his employment is terminated without cause or for Good Reason by Mr. O’Neill, he will be entitled to a payment equal to three times his then current base salary.   ;If Mr. O’Neill’s employment is terminated for cause, or Mr. O’Neill terminates this employment without Good Reason on less than 180 days prior written notice, all vested and unvested stock options, O’Neill Director RSUs and phantom stock awards shall be forfeited. In the event the termination payments to Mr. O’Neill would subject him to a parachute tax under the U.S. Internal Revenue Code, the Corporation is required to pay him a gross up amount to indemnify him for the parachute tax, which is estimated to be US$8,100.  In accordance with US law, if Mr. O’Neill is a “specified employee” (within the meaning of Section 409A of the Internal Revenue Code), payment of (i) vested RSUs, (ii) vested Phantom Stock Awards, (iii) the amounts in his Deferral Account, and (iv) three times base salary will not be made until the earliest to occur of: (A) the first day of the seventh month following the date of Mr. O’Neill’s separation from service but in no event late r than the period permitted under Treasury Regulation Section 1.409A-3(d); and (B) Mr. O’Neill’s death.

The executive employment agreements for Alan Mayne and James Pounds, respectively, provide that if their employment is terminated without just cause, or if they elect to terminate the agreement within six months of a change in control for Good Reason, they will be entitled to receive: (a) a payment equal to two times their then current annual salary; and (b) an amount equal to two times the greater of: (i) their last year’s bonus; or (ii) the average of their bonuses for the last two fiscal periods.  

The Human Resources & Compensation Committee determined that in the light of capping the bonuses for Fiscal 2009 and the current economic conditions, the employment agreements for Messrs. Gannicott, Mayne and Pounds would be amended to provide that the bonuses for Fiscal 2009 would not be included in the calculation of termination without just cause and change of control benefits.

27

Gilles Haumont’s executive employment agreement provides that if Harry Winston, Inc., decides to terminate his employment for any reason other than cause, he would be entitled to six months notice prior to such termination and relocation costs to France.  The Corporation does not have in place any compensatory plan or arrangement with Mr. Haumont that would be triggered by his resignation, retirement or other termination of employment, from a change of control of the Corporation, or a change in the executive officer's responsibilities following any such change of control.  Mr. Haumont was provided with six months written notice of termination on January 29, 2009, with termination effective on July 31, 2009.  Notwithstanding the foregoing, Mr. Haumont requested that his employment be terminated effective February 28, 2009. As a result, the base salary and housing allowance payments he would have earned during the subsequent five months were paid to him in a lump sum totaling US$182,474, less withholdings.  In addition, in accordance with his employment contract, the Corporation will pay his reasonable documented relocation costs for his personal belongings and him and his family to France and one return trip for him and his family to France before the relocation.  In accordance with the terms of the Phantom Stock Award, Mr. Haumont was entitled to receive one tranche of the Time Vested Portion of the Phantom Stock Award; however, as at January 31, 2009 the Phantom Stock Award had no value so he will not receive anything in respect thereof.  He received a Fiscal 2009 bonus of US$38,745.

The executive employment agreements for Messrs. O’Neill, Mayne and Pounds each have non-disclosure, non-solicitation and non-competition provisions for varying periods of time.  Mr. Gannicott’s executive employment agreement only contains a non-disclosure provision.  However, the termination payments are lump sum payments, generally paid within 5 business days of termination, (other than for Mr. O’Neill where compliance with Section 409A of the Internal Revenue Code, discussed earlier in this section, will determine the timing of payments to him), and the foregoing obligations are not conditions that apply to receiving the termination payments or benefits.

Grants of RSUs typically vest on the third anniversary of the date of the grant. One third of the RSUs vest if the change in control occurs prior to the first anniversary of the date of the grant, two thirds of the RSUs vest if the change in control occurs after the first anniversary and before the second anniversary of the date of the grant, and all the RSUs vest if the change in control occurs after the second anniversary of the date of the grant.

On the date of a change in control of the Corporation, stock options and any unvested portion of the Phantom Stock Award  become fully vested.

The estimated additional payment to the Named Executive Officers in the case of termination without cause, or upon a change of control, assuming that the triggering event took place on the last business day of the Corporation’s most recently completed financial year, are set out in the following table:

Name	Lump Sum Severance (US$)
Robert A. Gannicott	4,937,371(1)
Alan S. Mayne	1,109,737(1)
Thomas J. O’Neill	3,227,987
James Pounds	1,382,204(1)
Gilles Haumont	Nil

(1)

Converted at the Year-End Exchange Rate.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information as of January 31, 2009, concerning options outstanding pursuant to the Corporation’s existing stock option plan, which has been approved by the shareholders of the Corporation and which is the only compensation plan of the Corporation under which equity securities of the Corporation are authorized for issuance:

Plan Category	Number of Common Shares to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of Common Shares remaining available for future issuance under the stock option plan
Stock Option Plan	1,604,338	Cdn$22.45	4,395,662

The Corporation currently has in place a stock option plan, which was adopted by the directors of the Corporation on June 12, 2000 and approved by the shareholders of the Corporation on July 27, 2000, as amended (the “Stock Option Plan”).  An increase in the maximum number of Common Shares issuable pursuant to the Stock Option Plan to 6,000,000 from 4,500,000 was approved by the directors of the Corporation on March 31, 2008 and approved by the shareholders of the Corporation at the shareholders’ meeting held on June 4, 2008.

The material provisions of the Stock Option Plan are as follows:

(a)

the persons who are eligible to be granted options under the Stock Option Plan are “service providers”, which means (i) any director, officer or employee or insider of the Corporation or any of its affiliates, and (ii) any other person or company engaged to provide ongoing consulting, technical, management or other services to the Corporation or any affiliated entity of the Corporation;

(b)

as of the date hereof, there are stock options outstanding in respect of an aggregate of 3,250,679 Common Shares, representing approximately 4.2% of the currently outstanding Common Shares;

(c)

the Corporation has adopted policies which impose trading restrictions preventing officers, directors and employees from trading in securities of the Corporation (including exercising stock options) during certain periods (“Black-Out Periods”), the Stock Option Plan provides that if the expiry date of an option granted under the Stock Option Plan would otherwise occur during or within ten days following a Black-Out Period, the expiry date of such option shall be extended to the first business day which is at least ten days after the end of the Black-Out Period;

(d)

the number of Common Shares reserved for issuance to any one person, shall not exceed 2% of the number of Common Shares issued and outstanding on a non-diluted basis (the “Outstanding Issue”), at the time of such grant;  

(e)

the number of Common Shares reserved for issuance to Optionees who are, at the time of the particular grant, Related Persons, shall not exceed 10% of the Outstanding Issue, at the time of such grant;

(f)

the number of Common Shares issued within any one year period pursuant to the exercise of options to Optionees who are, at the time of issuance, Related Persons, shall not exceed 10% of the Outstanding Issue at that time, less the number of Common Shares which have been issued pursuant to the Stock Option Plan in the twelve month period immediately preceding such time (the “Adjusted Outstanding Issue”);

(g)

the number of Common Shares issued within any one year period pursuant to the exercise of Options and Existing Options to any one Related Person and his or her associates, shall not exceed 2% of the Adjusted Outstanding Issue.

(h)

the exercise price for the Common Shares under each option granted under the Stock Option Plan is be determined by the Board, or by a committee appointed for this purpose by the board, on the basis of the market price at the time of granting of each option.  If at the time of grant of an Option the shares of the Corporation are listed on the TSX, the exercise price may not be less than the market price on the TSX, where “market price” means the prior trading day closing price of the shares of the Corporation, or where there is no such closing price, the average of the most recent bid and ask of the shares of the Corporation on the TSX;

29

(i)

options granted under the Stock Option Plan may, at the discretion of the Board or committee, provide that the number of shares which may be acquired pursuant to the option shall not exceed a specified number or percentage each year (or other specified period) during the term of the option (a "vesting restriction");  however, all options become immediately exercisable upon the occurrence of an “Acceleration Event” as defined in the Stock Option Plan, which includes a take-over of the Corporation, a merger of the Corporation where the Corporation is not the continuing or surviving corporation, the sale of all or substantially all of the assets of the Corporation, or the liquidation or dissolution of the Corporation;

(j)

options may be granted under the Stock Option Plan for a term not exceeding ten years;

(k)

if a holder of an option ceases to be a service provider to the Corporation (other than as a result of the death of such holder), such holder’s options terminate on the earlier of (i) 60 days after the holder ceases to be a service provider, and (ii) the original expiry date of the option;

(l)

if a holder of an option dies while he or she is a service provider, such holder’s options terminate on the earlier of (i) one year after the date of death of the holder, and (ii) the original expiry date of the option;

(m)

the Stock Option Plan provides for a “cashless” settlement alternative whereby, at the election of the option holder, the value of the options at the time of exercise is settled by the surrendering of the options for “Substituted Rights” and the immediate conversion of those rights into Common Shares.

(n)

options may not be assigned or transferred, except (i) by will or by the laws of descent and distribution, or (ii) transfers to (A) personal holding companies controlled by a service provider, the shares of which are held directly or indirectly by the service provider, his or her spouse, minor children and/or minor grandchildren, or (B) a registered retirement savings plan established by and for the sole benefit of a service provider, or (C) an inter vivos trust if the service provider is the trustee, and the beneficiaries of which trust include only the service provider, his or her spouse, minor children and minor grandchildren;

(o)

the Board may from time to time amend the Stock Option Plan without approval from shareholders of the Corporation, other than with respect to the following matters: (i) the maximum number of Common Shares reserved for issuance under the Stock Option Plan; (ii) a reduction in the exercise price for options held by insiders of the Corporation; (iii) an extension to the term of any option held by insiders of the Corporation; and (iv) an increase in any limit on grants of options to insiders set out in the Stock Option Plan; and

(p)

the Corporation has not provided, and does not provide, any financial assistance to optionees to facilitate the exercise of options granted pursuant to the Stock Option Plan.

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

As of the date hereof, no director or executive officer of the Corporation, or proposed nominee for election as director, or any of their respective associates, is indebted to the Corporation or any of its subsidiaries or has indebtedness to another entity which has been the subject of a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by the Corporation or any of its subsidiaries.

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

No informed person of the Corporation, proposed director of the Corporation and no associate or affiliate of such informed person or proposed director has any material interest, direct or indirect, in any transaction since the commencement of the Corporation’s last completed fiscal year or in any proposed transaction, which, in either case, has materially affected or would materially affect the Corporation or any of its subsidiaries.

30

ADDITIONAL INFORMATION

Copies of the Management Information Circular, the Annual Report which contains the comparative audited financial statements of the Corporation, any interim financial statements subsequent to those statements contained in the Annual Report and Management’s Discussion and Analysis, the Annual Information Form, copies of charters of the committees of the Board and the Corporate Governance Guidelines may be obtained from SEDAR at www.sedar.com or free of charge upon request from Investor Relations of the Corporation at P. O. Box 4569, Station “A”, Toronto, Ontario M5W 4T9, (416) 362-2237 ext. 290 or by emailing investor@harrywinston.com or by viewing the Corporation’s web site.  Throughout this Management Proxy Circular, references to document and information available on the Corporation’s website can be found at http://investor.harrywinston.com.

BOARD APPROVAL

The directors of the Corporation have approved the contents and sending of this Management Proxy Circular to the shareholders.  

Lyle R. Hepburn
Corporate Secretary
April 16, 2009

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SCHEDULE 1 - STATEMENT OF CORPORATE GOVERNANCE PRACTICES

Board of Directors

(a)

The Board is currently comprised of nine directors, of which five are considered to be unrelated and independent directors within the meaning of Canadian and US securities laws and the NYSE Rules.  A director is considered to be unrelated and independent by the Board if the Board determines that the director has no direct or indirect material relationship with the Corporation. A material relationship is a relationship that could, in the view of the Board, be reasonably expected to interfere with the exercise of the director’s judgment independent of management.  The independent directors of the Corporation are currently Matthew W. Barrett, Micheline Bouchard, Noel Harwerth, Daniel Jarvis and Laurent E. Mommeja.

(b)

The Board has determined that the related and non-independent directors of the Corporation are: Robert A. Gannicott, the Chief Executive Officer of the Corporation; Thomas J. O'Neill, the President of the Corporation; J. Roger B. Phillimore, because of his consulting arrangement with the Corporation, and Thomas M. Boehlert, because of his employment with Kinross Gold Corporation.

(c)

A majority of the directors of the Corporation are independent as defined in Section 1.2(1) of NI58-101.

(d)

Some of the directors of the Corporation are also directors of other reporting issuers, or the equivalent of a reporting issuer in a foreign jurisdiction.  The following table outlines such directorships held by the members of the Board as of March 31, 2009:

Name of Director	Other Directorships Held
Matthew W. Barrett	Goldman Sachs Bank USA
Thomas M. Boehlert	None
Micheline Bouchard	Telus Corporation, Citadel Group of Funds and Home Capital/Home Trust
Robert A. Gannicott	None
Noel Harwerth	Royal & Sun Alliance Insurance, Logica Group, Corporate Services Group and Sumitomo Mitsubishi Banking Europe
Daniel Jarvis	None
Laurent E. Mommeja	None
Thomas J. O’Neill	C & J Clark Limited, U.K.
J. Roger B. Phillimore	Lonmin plc

(e)

The Board has established a policy of having the independent directors hold meetings chaired by the Lead Director, independent of management and non-independent directors, at each regularly scheduled meeting and at certain special meetings. The Board held nine meetings during the last completed fiscal year. At five of such meetings, the independent directors held private sessions.

32

(f)

The Chairman of the Corporation, Robert A. Gannicott, is a non-independent director. John M. Willson, who was not a member of management and who was unrelated and independent was the Lead Director of the Corporation for the period from February 1, 2008 until June 4, 2008. Matthew W. Barrett, who is not a member of management and who is unrelated and independent, is the Lead Director for the Corporation.  He was appointed as the Lead Director on June 4, 2008. One of the principal responsibilities of the Lead Director is to oversee the Board processes so that it operates efficiently and effectively in carrying out its duties, and to act as a liaison between the Board and management. The Corporation has written guidelines for the Lead Director.  These guidelines are available on the Corporation's website.

(g)

The attendance at Board and Committee meetings for each of the directors proposed for election at the Meeting can be found in this Management Proxy Circular on page 14 (see “Meetings Held and Attendance of Directors”).  

Majority Voting Policy

Effective January 14, 2009, the Board adopted a majority voting policy for directors in order to promote enhanced director accountability. The policy stipulates that in an uncontested election any nominee for director with respect to whom a majority of the votes represented by proxies validly deposited prior to the annual meeting of the shareholders (the ‘‘Meeting’’) are ‘‘withheld’’ from his or her election (a ‘‘Majority Withheld Vote’’), shall submit his or her resignation to the Nominating & Corporate Governance Committee for consideration promptly following the Meeting.

The Nominating & Corporate Governance Committee shall consider the resignation and shall recommend to the Board whether or not to accept it. The Board shall consider the recommendation of the Nominating & Corporate Governance Committee and determine whether or not to accept the recommendation. A press release disclosing the Board’s determination (and the reasons for rejecting the resignation, if applicable) shall be issued within 90 days following the date of the Meeting.

Any director who tenders his or her resignation shall not participate in any meeting of the Nominating & Corporate Governance Committee, if he or she is a member of that Committee, or of the Board to consider whether his or her resignation shall be accepted. However, if the number of members of the Nominating & Corporate Governance Committee who received a Majority Withheld Vote at the Meeting is such that the remaining members of this committee do not constitute a quorum, then the directors who did not receive a Majority Withheld Vote shall appoint a committee to consider the resignations and recommend to the Board whether to accept them.

In a contested election, where the number of director nominees exceeds the number of directors to be elected, a plurality vote standard will continue to apply.

The majority voting policy, together with the change to give shareholders the option of voting for or withholding their votes in respect of individual director nominees, provides enhanced director accountability. These measures combined encourage individual board members to be diligent in the performance of their duties by providing shareholders with the right to vote for individual directors based on their individual performance as a director or withhold their votes for a director who fails to meet the standards required by the shareholders.

Board Mandate

The Board has the responsibility to manage, or supervise, the management of the business and affairs of the Corporation. The Board selects and appoints the Corporation’s Chief Executive Officer and, through him, other officers and senior management to whom the Board delegates certain of its power of management. The Board approves strategy, sets targets, performance standards and policies to guide management, monitors and advises management, sets their compensation and, if necessary, replaces them.

33

To assist the Board in the implementation of key policies, it delegates some of its responsibility to committees. As part of its duties, the Board reviews, through reports from the Nominating & Corporate Governance Committee, and approves the structure, Charters and composition of its committees. It also receives and reviews regular and timely reports of the activities and findings of those committees.

The fundamental responsibility of the Board is to appoint a competent executive team and to oversee the management of the business, with a view to maximizing shareholder value and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control.  The Board has adopted specific corporate governance guidelines which are posted on the Corporation’s website under the name Corporate Governance Guidelines.

Position Descriptions

The Corporation has written guidelines for the Chairman and Chief Executive Officer, and for the Chairs of the Committees. These guidelines are available on the Corporation's website.

The Chief Executive Officer’s position description is reviewed by the Board on an on-going basis. Annual objectives for the Corporation and the Chief Executive Officer are developed jointly by the Board and the Chief Executive Officer. The attainment of these objectives is reviewed by the Board. The Chief Executive Officer is also responsible and accountable for pursuing the strategic goals which are considered and adopted by the Board at its annual strategy meetings.

Orientation and Continuing Education

(a)

New directors are provided with a comprehensive information package on the Corporation and its management, and are fully briefed by senior management on the corporate organization and key current issues. Visits to key operations are also arranged for new directors.

(b)

Ongoing training and development of directors consists of similar components, i.e., updated written corporate information, site visits and presentations by experts in numerous fields that are important to the Corporation’s interests. Individual directors may engage outside advisors, with the authorization of the Nominating & Corporate Governance Committee.

Ethical Business Conduct

The Nominating & Corporate Governance Committee is responsible for developing and reviewing, with recommendations to the Board where appropriate, the Corporation’s approach to all matters of corporate governance, and reporting thereon to the Board.  The Corporation has adopted a Code of Ethics and Business Conduct, a Policy on Corporate Disclosure, Confidentiality and Employee Trading, an Insider Trading Policy and a Whistleblower Protection Policy. All of these policies are available on the Corporation's website, and will be provided to any Shareholder who requests them.  The foregoing Code of Ethics and Business Conduct of the Corporation, as amended, has been filed on SEDAR at www.sedar.com.

The SEC and National Instrument 52-110 – Audit Committees require a corporation to disclose if it has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller.  The Corporation is in compliance. The Corporation has adopted a code of ethics entitled Code of Ethics and Business Conduct which is applicable to all directors, officers and employees of the Corporation and its subsidiaries. The Code of Ethics and Business Conduct provides a framework for directors, officers and employees on the conduct and ethical decision making integral to their work. Management of the Corporation is committed to fostering and maintaining a culture of high ethical standards and compliance, and ensuring a work environment that encourages employees to raise concerns to the attention of management and promptly addressing any employee compliance concerns.

34

The Code of Ethics and Business Conduct provides that management is responsible for monitoring compliance with the Code and for communicating the Code to employees. Employees are advised that they have a duty to report any known or suspected violation of the Code, including any violation of the laws, rules, regulations or policies that apply to the Corporation. Employees are to report such violations to their supervisor, the Corporate Secretary, or by following the procedures set out in the Corporation’s Whistleblower Protection Policy. It is ultimately the Board’s responsibility for monitoring compliance with the Code. The Board, through its Nominating & Corporate Governance Committee, reviews the Code annually to ensure that it complies with legal requirements and is in alignment with best practices.

The Board has not granted any waiver of the Code of Ethics and Business Conduct. Accordingly, no material change report has been required or filed.

Individual directors are expected to indicate a material interest in any transaction or agreement that the Corporation is considering. Directors who have a material interest in a transaction or agreement would not be present for discussions on such transaction or agreement, and would not participate in any vote on the matter.

Nomination of Directors

The Nominating & Corporate Governance Committee, composed entirely of unrelated and independent directors, considers all proposed nominees for the Board and recommends nominees to the Board. The Committee periodically assesses the skill sets of current directors and recommends desired background and qualifications for director nominees, taking into account the needs of the Board at the time. Breadth of perspective, experience and judgment are critical qualities of a director, and strongly influence the selection criteria for Board membership.  All directors serve, or have served, on a number of corporate boards, and bring a broad base of international experience and expertise to Board deliberations.

The Board assessment is done periodically, and consists of an interview and discussion by the Chair of the Nominating & Corporate Governance Committee with each director on an informal basis. The Committee addresses issues such as director representation in terms of expertise and experience, Board size, director succession planning, meeting quality and efficiency, director contribution and interaction, management effectiveness and the Board’s relationship with management. In addition, the Committee retained the services of Norman Anderson & Associates Ltd. to undertake a Board assessment in 2005.  In fiscal 2008 and 2009, each director completed an evaluation form which contained questions concerning the effectiveness of the Board and its committees, operation of the Board, Board size, number of meetings held per annum, meeting quality and efficiency, director contribution and interaction, strategic planning opportunities, management effectiveness and the Board’s relatio nship with management.  The responses were reviewed by the Lead Director and presented to the Board.

The Board and the Nominating & Corporate Governance Committee, with the Lead Director, monitor the size of the Board to ensure effective decision-making.  The Nominating & Corporate Governance Committee also develops, reviews and monitors criteria for selecting directors by assessing their qualification, personal qualities, geographical representation, business background and diversified experience.  The directors have proposed nine nominees for the position of director in the upcoming year.

Compensation

Directors’ Compensation

The adequacy and form of director compensation is reviewed on an annual basis. In addition to directors’ responsibilities and time commitment, this review also takes into account director remuneration of peer companies. The Nominating & Corporate Governance Committee recommends the directors’ compensation to the Board, for approval.  Details regarding directors’ compensation can be found on pages 11 to 13 of this Management Proxy Circular (see “Director Compensation Table”).

35

In January, 2007, the Nominating & Corporate Governance Committee reviewed the directors’ compensation which had been set, in part, based on the recommendations of its consultants, Towers Perrin, in 2004, and recommended that a 15% increase in director compensation was appropriate.  The Nominating & Corporate Governance Committee recommended that meeting fees and annual cash remuneration would remain the same.  However, the annual and initial grant of DSUs to non-executive directors would each be increased by 500 DSUs.  Accordingly, effective February 1, 2007, non-executive directors were entitled to receive an initial grant of 2,500 DSUs when they are first appointed to the Board and an annual grant of 1,500 DSUs at the beginning of each fiscal year thereafter.  In January, 2008, the Nominating & Corporate Governance Committee reviewed the Outside Directors’ Fee Study prepared by Hewitt Associates LLC.  The Committee recommended that no changes b e made to director compensation, with the exception that the annual cash retainers and annual DSU grants be paid on a quarterly basis.  The decisions made by the Nominating & Corporate Governance Committee are the responsibility of the Nominating & Corporate Governance Committee and may reflect factors and considerations other than the information and recommendations provided by its compensation consultants.  In January, 2009, the Nominating & Corporate Governance Committee again recommended that no changes be made to director compensation.

The Nominating & Corporate Governance Committee is composed entirely of unrelated and independent directors. The Nominating & Corporate Governance Committee’s responsibilities are set out in its Charter.  A summary of these responsibilities can be found on pages 17 and 18 of the Management Proxy Circular (see “Report of the Nominating & Corporate Governance Committee”). The Charter of the Nominating & Corporate Governance Committee is available on the Corporation’s website.

Senior Officers’ Compensation

The Human Resources & Compensation Committee recommends the senior officers’ compensation to the Board, for approval.  

The Corporation retained the services of Hewitt Associates LLC in 2007 and again during the fiscal year ended January 31, 2008 and January 31, 2009 to compile corporate information and industry comparative data in order to prepare a foundation for ongoing management of executive compensation. A brief description of the services performed by Hewitt Associates LLC can be found on page 21 of this Management Proxy Circular (see “Determination of Compensation”).

The Human Resources & Compensation Committee is composed entirely of unrelated and independent directors. The Human Resources & Compensation Committee’s responsibilities are set out in the Work Plan of the Committee.  A list of these responsibilities can be found on page 16 of the Management Proxy Circular (see “Report of the Human Resources & Compensation Committee”). The Charter of the Human Resources & Compensation Committee is available on the Corporation’s website.

Board Committees

The Board has three Committees: Audit, Nominating & Corporate Governance and Human Resources & Compensation. The Committees are composed entirely of independent directors. The roles and responsibilities of the Committees are set out in Charters which are available on the Corporation’s website. These Charters are reviewed annually to ensure that they comply with legal requirements and are in alignment with best practices. To assist the Committee in fulfilling their respective responsibilities, such responsibilities are set out in Work Plans which are approved at the beginning of each year.

Assessments

Strategic planning is at the forefront of deliberations at meetings of the Board. Management is responsible for the development of overall corporate strategies. These strategies are under constant review by the Board and senior management.

36

The Board conducts an annual evaluation of the effectiveness of the Board and its Committees.

Throughout the year, the Board reviews the performance of management and the Corporation against approved business plans and policies. The Board also reviews and approves specific proposals for all major capital expenditures, checking for consistency with budgets and strategic plans, and deals with a large number of individual issues and situations requiring decision by the Corporation, such as acquisitions, investments and divestitures.

The Board ensures that an appropriate risk assessment process is in place to identify, assess and manage the principal risks of the Corporation's business. Management reports regularly to the Board in relation to principal risks which potentially affect the Corporation's business activities.

The Board regularly reviews management succession plans and, where necessary, initiates and supervises searches for replacement candidates. It also sets objectives for, and reviews the performance of, the senior officers of the Corporation, and approves their appointments and compensation.

The Board ensures that mechanisms are in place to guide the organization in its activities. The Board reviews and approves a broad range of internal control and management systems covering, for example, expenditure approvals, financial controls, environmental and health and safety matters. Such systems are designed to inform the Board of the integrity of the financial and other data of the Corporation, and are subject to audit reviews. Management is required to comply with legal and regulatory requirements with respect to all of the Corporation’s activities.

The Corporation has a sound governance structure in place at both management and Board levels, and a comprehensive system of internal control relating to financial record reliability. These structures and systems are continually assessed, reviewed and enhanced in light of ongoing Canadian and U.S. regulatory developments affecting corporate governance, accountability and disclosure.

37

EX-2

Exhibit 2

HARRY WINSTON DIAMOND CORPORATION
PROXY SOLICITED BY MANAGEMENTAND THE BOARD OF DIRECTORS

Annual Meeting of Shareholders on June 4, 2009

The undersigned shareholder of Harry Winston Diamond Corporation (the "Corporation") hereby nominates, constitutes and appoints Robert A. Gannicott, or failing him, Matthew W. Barrett, both directors of the Corporation, or instead of either of them                                              , as nominee of the undersigned to attend and vote for and on behalf of the undersigned at the annual meeting of shareholders of the Corporation to be held on the 4^th day of June, 2009 (the "Meeting") to be held at the Fairmont Royal York Hotel, 100 Front Street West, Toronto, Ontario, and at any adjournment or adjournments thereof, to the same extent and with the same power as if the undersigned were personally present at the Meeting or such adjournment or adjournments thereof, and without limiting the generality of the power hereby conferred, the nominees are specifically directed to vote the shares represented by this proxy as indicated below.

1.	For the election of the following nominees as directors of the Corporation, as named in the accompanying Management Proxy Circular, to hold office until the next annual meeting of shareholders or until their successors are elected:
		VOTE FOR	WITHHOLD VOTE
	Matthew W. Barrett	£	£
	Micheline Bouchard	£	£
	Robert A. Gannicott	£	£
	Noel Harwerth	£	£
	Daniel Jarvis	£	£
	Laurent E. Mommeja,	£	£
	Thomas J. O’Neill	£	£
	J. Roger B. Phillimore	£	£
2.	For the re-appointment of KPMG LLP, Chartered Accountants, as auditors of the Corporation and the authorization of the directors to fix their remuneration.
	VOTE FOR              £	WITHHOLD VOTE	£
This proxy revokes and supersedes all proxies of earlier date.
DATED this _________________ day of _______________-, 2009.
Signature of Shareholder
Name of Shareholder (print)

- -2-

The shares represented by this proxy will be voted in accordance with the instructions given on any vote or ballot called at the Meeting.  Unless a specific instruction is indicated, said shares will be voted for confirmation and/or approval of the matters referred to on the reverse side hereon.

This proxy confers discretionary authority to vote in respect of any amendments or variations to the matters identified in the notice of meeting or any other matter which may properly come before the Meeting and in such manner as such nominee in his judgment may determine.

A shareholder has the right to appoint a person to attend and act for him and on his behalf at the Meeting other than the persons designated in this form of proxy.  Such right may be exercised by filling the name of such person in the blank space provided and striking out the names of management's nominees, or by completing another proper form of proxy and, in either case, depositing the proxy as instructed below.

To be valid, this proxy must be deposited at the office of CIBC Mellon Trust Company by mail at P.O. Box 721, Agincourt, Ontario, Canada, M1S 0A1 or by fax to 1-866-781-3111 (toll free) or 416-368-2502, no later than 5:00 p.m. (Toronto time) on June 2, 2009 or if the Meeting is adjourned, no later than 10:00 a.m. (Toronto time) on the last business day preceding the day on which the Meeting is adjourned.

If not dated, this proxy is deemed to bear the date on which it was mailed on behalf of management of the Corporation.

THIS PROXY IS SOLICITED BY THE MANAGEMENT OF THE CORPORATION FOR USE AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 4, 2009.  THE ATTENTION OF SHAREHOLDERS IS DIRECTED TO THE MANAGEMENT PROXY CIRCULAR WHICH ACCOMPANIES THIS FORM OF PROXY.

EX-3

Exhibit 3

HARRY WINSTON DIAMOND CORPORATION
(the “Corporation”)

ANNUAL REQUEST FORM

TO:

REGISTERED AND BENEFICIAL SHAREHOLDERS

In accordance with National Instrument 51-102, shareholders (including beneficial owners) may elect annually to have their names added to the Supplemental Mailing List of the Corporation.  If you wish to receive the annual financial statements and management’s discussion and analysis (“MD&A”) for the annual financial statements, the interim financial statements and MD&A for the interim financial statements of the Corporation, or both, you must complete this form and forward it, either with your proxy or separately, to our transfer agent at the address below, or by completing the on-line form at www.cibcmellon.com/financialstatements specifying our company code “0237A”:

CIBC MELLON TRUST COMPANY
P.O. Box 7010, Adelaide Street Postal Station
Toronto, ON   M5C 2W9

Please put my name on your Supplemental Mailing List for the Corporation and send me the documents as indicated below:

Interim Financial Statements and Interim MD&A of the Corporation               

£

Annual Financial Statements and Annual MD&A of the Corporation               

£

In respect of the foregoing, please note that shareholders will receive the Annual Financial Statements and Annual MD&A of the Corporation when the Corporation mails its annual meeting materials.  Accordingly, shareholders who have requested that their names be put on the supplemental mailing list will receive the Annual Financial Statements and Annual MD&A of the Corporation twice.  Copies of these documents may also be found on SEDAR at www.sedar.com or on the Corporation's website at http://investor.harrywinston.com.  

DATED the _______________________ day of _______________________, 2009.
	(First Name and Surname)
	(Number and Street)        (Apartment/Suite)
	(City)          (Province)
	(Postal Code)
	(Signature of Shareholder)

CUSIP:  41587B100

EX-4

Exhibit 4

Harry Winston Diamond Corporation

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

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

2
Letter to Shareholders
5
Financial Highlights
6
Management’s Discussion and Analysis
26
Management’s Responsibility for Financial Information
27
Shareholders’ Auditors’ Report
28
Report on Internal Control over Financial Reporting
29
Consolidated Financial Statements
33
Notes to Consolidated Financial Statements
53
Diavik Diamond Mine Mineral Reserve and Mineral Resource Statement
54
Harry Winston Retail Salons and Rough Diamond Sales Offices
55
Board of Directors and Senior Management
56
Shareholder Information
 

2009 ANNUAL REPORT 1

HARRY WINSTON DIAMOND CORPORATION

Fellow Shareholders,

For investors and other participants in the diamond business, or indeed most other commodity businesses, this has been an annus horribilis without clear historical precedent to mark the way forward. The present challenge is survival rather than near-term earnings growth. We have taken a conservative approach to the uncertainties of the immediate future and prepared for a prolongation of current conditions rather than the expectation of near-term recovery while maintaining the ability to react quickly to a recovery of demand. Although painful, we have reduced employment levels, paid down debt and taken write-downs to better align book values with equity market valuations. In our jewelry and watch businesses we have slowed the pace of expansion while being careful to keep the core platform intact to respond to recovery.

The majority owner and operator of the Diavik Diamond Mine, Rio Tinto, has taken the same approach with deferral of capital expenditures and reduction in operating costs through production cuts as all participants in the diamond industry adjust production levels to the diminished needs of their customer base. Diamond markets have recently stabilized as rough diamond prices adjust against the new levels of polished diamond prices. This means that diamond prices have recovered somewhat from their lows as the supply pipeline has emptied in response to severely diminished credit. It will, however, take a resurgence of demand from the consumer to return prices to the levels of last year.

The Diavik Diamond Mine is one of the lowest cost diamond producers in the world. It remains cash positive even through this very challenging environment. With the help of Rio Tinto we have soundly prepared all of our business segments to weather the uncertainties of the present as we prepare for the earnings power of the future.

The diamond business is underpinned by the secure historical association of diamonds with marriage ceremonies in many cultures around the world. Diavik is a premium diamond deposit and Harry Winston is a premium diamond brand. Together they constitute the premium diamond investment platform in anticipation of world commercial recovery.

Robert A. Gannicott
Chairman & Chief Executive Officer

2 2009 ANNUAL REPORT

 

2009 ANNUAL REPORT 3

 

4 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

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

 Harry Winston Diamond Corporation recorded consolidated net earnings of $70.1 million or $1.15 per share for the year, compared to net earnings of $106.4 million or $1.82 per share in the prior year. Consolidated net earnings for the year included a non-cash write-down of the goodwill relating to the retail operations of $93.8 million or $1.54 per share. The write-down was partially offset by a $59.1 million net foreign exchange gain or $0.96 per share, compared to a net $43.4 million foreign exchange loss or $0.74 per share in the prior year. Consolidated net earnings also included an after-tax gain on insurance settlement of $9.9 million or $0.16 per share, compared to $8.0 million or $0.14 per share in the prior year.

Consolidated sales were $609.2 million for the year compared to $679.3 million for the prior year, resulting in a 13% decrease in gross margin and a 24% decrease in consolidated earnings from operations.

The mining segment recorded sales of $328.2 million, a 21% decrease from $413.8 million in the prior year. The decrease in sales resulted from lower rough diamond production and lower rough diamond prices in the fourth quarter. Rough diamond production for the calendar year was down 23% to 3.7 million carats produced versus 4.8 million for the prior year. Earnings from operations for the mining segment decreased 24% to $168.6 million compared to the prior year. The decrease was due primarily to lower sales and to a lesser degree a decrease in gross margin.

The retail segment recorded a 6% increase in sales to $281.0 million, with a loss from operations of $2.5 million compared to a loss from operations of $3.1 million in the prior year. Retail segment SG&A as a percentage of sales remained consistent with the prior year at 48%.

 

2009 ANNUAL REPORT 5

HARRY WINSTON DIAMOND CORPORATION

Management’s Discussion and Analysis
Prepared as of April 16, 2009 (All figures are in United States dollars unless otherwise indicated)

The following is management’s discussion and analysis (“MD&A”) of the results of operations for Harry Winston Diamond Corporation (“Harry Winston Diamond Corporation”, or the “Company”) for the fiscal year ended January 31, 2009, and its financial position as at January 31, 2009. This MD&A is based on the Company’s consolidated financial statements prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto. Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to “year” refer to the fiscal year of Harry Winston Diamond Corporation ended January 31. Unless otherwise indicated, references to “international” for the retail segment refer to Europe and Asia.

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

CAUTION REGARDING FORWARD-LOOKING INFORMATION

Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding 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 from the forward looking information. See “Risks and Uncertainties” on page 21 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, credit and general capital market conditions and the ability of the Company to refinance or replace its existing credit facilities, the level of worldwide diamond production and world and US economic conditions and demand for luxury goods. Specifically, in estimating Harry Winston Diamond Corporation’s projected share of the Diavik Diamond Mine capital expenditure requirements over the next five years, Harry Winston Diamond Corporation has used an average Canadian/US dollar exchange rate of $0.86. In making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends in the retail segment, the Company has made assumptions regarding, among other things, world and US economic conditions and demand for luxury goods. While 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 21.

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 21of this Annual 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 Harry Winston Diamond Corporation’s operations.

 

6 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

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

SUMMARY DISCUSSION

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 operating under the Harry Winston^® brand.

As at January 31, 2009, the Company’s most significant asset is a 40% ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an unincorporated joint arrangement between Diavik Diamond Mines Inc. (“DDMI”) (60%) and Harry Winston Diamond Limited Partnership (40%) where Harry Winston Diamond Corporation owns an undivided 40% ownership 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 Limited Partnership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada.

On March 19, 2009, the Company announced a strategic investment by Kinross Gold Corporation (“Kinross”), whereby Kinross will make a net investment of $150.0 million to acquire an indirect interest in the Diavik Diamond Mine and a direct equity stake in the Company. Kinross will subscribe for 15.2 million of the Company’s treasury shares at a price of $3.00 per share, being approximately 19.9% of the Company’s issued equity post the transaction. Kinross will also subscribe for new partnership units representing a 22.5% interest in the limited partnership which holds the Company’s 40% ownership interest in the Diavik Diamond Mine, for a net effective subscription value of $104.4 million. The transaction closed on March 31, 2009 and the Company’s economic interest in the Diavik Diamond Mine is now 31%. With the closing of the Kinross transaction, all amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009. If the transaction had closed on January 31, 2009, the Company would have recorded a non-cash dilution loss of approximately $30 million in respect of its interest in the Diavik Diamond Mine.

MARKET COMMENTARY

The Diamond Market

During the first eight months of fiscal 2009 sales of rough diamonds were strong and increases in prices were achieved. Commencing in the fourth quarter of fiscal 2009, the diamond industry began to be significantly impacted by the global economic slowdown and the ongoing world-wide credit crisis.

The availability of credit to the diamond processing and jewelry manufacturing sectors of the industry has declined, thus reducing demand for rough diamonds as the industry supply lines de-stock. The Company anticipates challenging trading conditions for the near-term although subdued demand has returned for certain rough diamond categories reflecting the sell-through of core engagement ring type products which account for about half of the overall polished diamond market.

The decline in polished diamond prices has been significantly less than the price declines in rough diamonds although sales volumes have declined substantially as the world economic crisis has deepened.

^® Harry Winston is a registered trademark of Harry Winston Inc.

 

2009 ANNUAL REPORT 7

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

The Retail Jewelry Market

The luxury diamond jewelry market has also been negatively affected by the severity of the global economic downturn. The major markets of the United States and Japan have experienced the most significant decreases in demand, while consumers in the Middle East and parts of Asia continue to purchase luxury diamond products.

CONSOLIDATED FINANCIAL RESULTS

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

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

		2009			2009			2009			2009			2008			2008			2008			2008			2009			2008			2007
		Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1			Total			Total			Total
Sales	$	118,399		$	148,623		$	186,119		$	156,079		$	188,195		$	176,478		$	173,269		$	141,365		$	609,220		$	679,307		$	558,793
Cost of sales		68,908			71,679			73,542			73,149			83,637			74,591			81,827			71,132			287,278			311,187			285,498
Gross margin		49,491			76,944			112,577			82,930			104,558			101,887			91,442			70,233			321,942			368,120			273,295
Gross margin (%)		41.8%			51.8%			60.5%			53.1%			55.6%			57.7%			52.8%			49.7%			52.8%			54.2%			48.9%
Selling, general and administrative expenses		39,399			33,998			39,194			43,285			45,494			35,539			35,201			34,211			155,876			150,445			126,536
Earnings from operations		10,092			42,946			73,383			39,645			59,064			66,348			56,241			36,022			166,066			217,675			146,759
Interest and financing expenses		(4,960	)		(4,678	)		(5,366	)		(5,453	)		(7,082	)		(7,422	)		(7,222	)		(6,132	)		(20,457	)		(27,858	)		(21,150	)
Other income		778			407			815			246			706			594			545			913			2,246			2,758			5,081
Insurance settlement		17,240			–			–			–			13,488			–			–			–			17,240			13,488			–
Impairment charge		(93,780	)		–			–			–			–			–			–			–			(93,780	)		–			–
Foreign exchange gain (loss)		4,649			48,982			5,301			155			22,270			(40,584	)		(11,785	)		(13,292	)		59,087			(43,391	)		8,784
Earnings (loss) before income taxes		(65,981	)		87,657			74,133			34,593			88,446			18,936			37,779			17,511			130,402			162,672			139,474
Income taxes (recovery)		7,052			15,685			24,185			13,336			(1,968	)		26,197			17,747			14,118			60,256			56,094			34,830
Earnings (loss) before minority interest		(73,033	)		71,972			49,948			21,257			90,414			(7,261	)		20,032			3,393			70,146			106,578			104,644
Minority interest		(58	)		81			1			1			(34	)		90			(26	)		140			25			170			375
Net earnings (loss)	$	(72,975	)	$	71,891		$	49,947		$	21,256		$	90,448		$	(7,351	)	$	20,058		$	3,253		$	70,121		$	106,408		$	104,269
Basic earnings (loss) per share	$	(1.19	)	$	1.17		$	0.81		$	0.35		$	1.55		$	(0.13	)	$	0.34		$	0.06		$	1.15		$	1.82		$	1.79
Diluted earnings (loss) per share	$	(1.19	)	$	1.17		$	0.81		$	0.35		$	1.54		$	(0.13	)	$	0.33		$	0.05		$	1.15		$	1.81		$	1.76
Cash dividends declared per share	$	0.05		$	0.05		$	0.05		$	0.05		$	0.05		$	0.25		$	0.25		$	0.25		$	0.20		$	0.80		$	1.00
Total assets(i)	$	1,567		$	1,645		$	1,637		$	1,591		$	1,494		$	1,433		$	1,367		$	1,315		$	1,567		$	1,494		$	1,288
Total long-term liabilities(i)	$	550		$	562		$	617		$	634		$	660		$	530		$	486		$	408		$	550		$	660		$	536

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

The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and retail segments. Harry Winston Diamond Corporation expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly results for the retail segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. See “Segmented Analysis” on page 13 for additional information.

8 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

Year Ended January 31, 2009 Compared to Year Ended January 31, 2008

Consolidated Net Earnings

Harry Winston Diamond Corporation’s net earnings for the fiscal year ended January 31, 2009 totalled $70.1 million or $1.15 per share, compared to net earnings of $106.4 million or $1.82 per share for the prior year. Net earnings were impacted by a non-cash write-down of the goodwill relating to the retail operations of $93.8 million or $1.54 per share. The write-down was partially offset by a net $59.1 million foreign exchange gain or $0.96 per share, compared to a net foreign exchange loss of $43.4 million or $0.74 per share in the prior year. Also impacting results was an after-tax gain on insurance settlement of $9.9 million or $0.16 per share that resulted from the December 2008 robbery at the Harry Winston Paris salon, compared to an after-tax gain of $8.0 million or $0.14 per share from the October 2007 robbery.

Consolidated Sales

The Company recorded sales for the fiscal year ended January 31, 2009 of $609.2 million compared to sales of $679.3 million for the prior year. On a segment basis, rough diamond sales accounted for $328.2 million of these sales compared to $413.8 million for the prior year. The Company completed nine rough diamond sales, one of which was an open-market tender, during the fiscal year, compared to ten rough diamond sales the prior year. Harry Winston’s retail segment sales were $281.0 million, compared to $265.5 million for the prior year.

Consolidated Cost of Sales and Gross Margin

The Company recorded cost of sales of $287.3 million for a gross margin of 52.8% during the fiscal year compared to $311.2 million and a gross margin of 54.2% during the prior year. The Company’s cost of sales includes costs associated with mining, sorting and retail activities. See “Segmented Analysis” on page 13 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. Harry Winston Diamond Corporation incurred SG&A expenses of $155.9 million for the fiscal year compared to $150.4 million for the prior year. The increase of $5.4 million in SG&A expenses from the prior year is primarily due to an increase of $4.0 million in insurance premiums, $3.4 million in amortization expense, $3.0 million in rent and building related expenses, $1.3 million in salaries and benefits, partially offset by a decrease of $3.0 million in advertising and selling expenses, $2.1 million in stock-based compensation, and $1.2 million in professional fees.

Included in SG&A expenses for the year are $19.9 million for the mining segment as compared to $23.4 million for the prior year, and $136.0 million for the retail segment as compared to $127.1 million for 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 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 13 for additional information.

Consolidated Income Taxes

The Company recorded a tax expense of $60.3 million during the twelve months ended January 31, 2009, compared to a tax expense of $56.1 million in the comparable period of the prior year. The Company’s effective income tax rate for the year, excluding Harry Winston’s retail segment, is 27%, 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. During the twelve months ended January 31, 2009, the Company recorded an unrealized foreign exchange gain of $48.6 million on the revaluation of the Canadian dollar denominated future income tax liability, as compared to an unrealized foreign exchange loss of $37.0 million recorded in the comparable period of the prior year. The unrealized foreign exchange gain is not taxable for Canadian income tax purposes. The Company also recorded a non-cash impairment charge of $93.8 million in relation to the goodwill of Harry Winston’s retail segment in the current year. The impairment charge is not deductible for Canadian income tax purposes. The impact of foreign exchange and impairment charge on goodwill are the main causes of the unusual effective tax rate for the current 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 2028.

 

2009 ANNUAL REPORT 9

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

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

	Year ended	Year ended
	January 31, 2009	January 31, 2008
Statutory income tax rate	31%	34%
Northwest Territories mining royalty (net of income tax relief)	12%	12%
Impact of foreign exchange	(16)%	6%
Impact of changes in future income tax rates	–%	(7)%
Earnings subject to tax different than statutory rate	(5)%	(4)%
Changes in valuation allowance	2%	(2)%
Benefits of losses recognized through reduction of goodwill	–%	3%
Assessments and adjustments	–%	(7)%
Impact of impairment charge on goodwill	22%	–%
Other items	–%	(1)%
Effective income tax rate	46%	34%

Consolidated Interest and Financing Expenses

Interest and financing expenses of $20.5 million were incurred during the fiscal year compared to $27.9 million for the prior year. The reduction in interest and financing expenses relates to a combination of reduction in debt levels in the mining segment and lower interest rates.

Consolidated Other Income

Other income, which includes interest income on the Company’s various bank balances, was $2.2 million during the year compared to $2.8 million in the prior year.

Consolidated Insurance Settlement

In December 2008, approximately $31.7 million in Company-owned and consigned retail inventory at cost was stolen during a second robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $16.7 million in the fourth quarter on settlement of the insurance claim compared to a pre-tax gain of $13.5 million on the first Paris salon robbery that occurred in the third quarter of the prior year. The remaining balance of the insurance claim is $3.3 million, of which $1.0 million was received in February 2009; the insurance company has agreed to pay the balance of $2.3 million which is expected to be received during April 2009. Also included in insurance settlement is a $0.5 million gain resulting from an excavator fire that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine.

Consolidated Impairment Charge

The Company tested goodwill for impairment and determined that the carrying value of its retail segment is below the fair value as described on page 20. The Company recorded a non-cash goodwill impairment charge of $93.8 million during the fourth quarter.

Consolidated Foreign Exchange Gain (Loss)

A net foreign exchange gain of $59.1 million was recognized during the fiscal year compared with a net foreign exchange loss of $43.4 million recognized during the prior year. The current year 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 January 31, 2009. The Company’s ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant derivative instruments outstanding.

 

10 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Consolidated Net Earnings

The Company recorded a fourth quarter loss of $73.0 million or $1.19 per share compared to net earnings of $90.4 million or $1.55 per share in the fourth quarter of the prior year. The net loss resulted from a non-cash write-down of the goodwill relating to the retail operations of $93.8 million or $1.53 per share. The Company recognized a net $4.6 million foreign exchange gain or $0.08 per share, compared to a net foreign exchange gain of $22.3 million or $0.38 per share in the comparable quarter of the prior year. Also impacting results was an after-tax gain on insurance settlement of $9.9 million or $0.16 per share that resulted from the December 2008 robbery at the Harry Winston Paris salon, compared to a fourth quarter after-tax gain of $8.0 million or $0.14 per share from the October 2007 robbery.

Consolidated Sales

Sales for the fourth quarter totalled $118.4 million, consisting of rough diamond sales of $51.1 million and retail segment sales of $67.3 million. This compares to sales of $188.2 million in the comparable quarter of the prior year (rough diamond sales of $103.2 million and retail segment sales of $85.0 million). The Company held two primary rough diamond sales in the fourth quarter, consistent with the prior year. Ongoing quarterly variations in revenues are inherent in Harry Winston Diamond Corporation’s business, resulting from the seasonality of the mining and retail activities as well as from the variability of the rough diamond sales schedule.

Consolidated Cost of Sales and Gross Margin

The Company’s fourth quarter cost of sales was $68.9 million for a gross margin of 41.8% compared to $83.6 million cost of sales and gross margin of 55.6% for the comparable quarter of the prior year. The Company’s cost of sales includes costs associated with mining, rough diamond sorting and retail sales activities. See “Segmented Analysis” on page 13 for additional information.

Consolidated Selling, General and Administrative Expenses

The principal components of SG&A expenses include expenses for salaries and benefits, advertising, professional fees, rent and building related costs. The Company incurred SG&A expenses of $39.4 million for the fourth quarter, compared to $45.5 million in the comparable quarter of the prior year.

Included in SG&A expenses for the fourth quarter are $4.4 million for the mining segment as compared to $5.7 million for the comparable quarter of the prior year, and $35.0 million for the retail segment as compared to $39.8 million for the comparable quarter of the prior year. For the mining segment, the decrease was primarily due to a reduction in discretionary spending. For the retail segment, the decrease was due to a combination of reduced advertising and selling expenses and an adjustment to an equity-related compensation program resulting from the reduction in fair value of the retail segment. See “Segmented Analysis” on page 13 for additional information.

Consolidated Income Taxes

The Company recorded a tax expense of $7.1 million during the fourth quarter, compared to a net tax recovery of $2.0 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 28%, 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. During the fourth quarter of fiscal 2009, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $3.9 million on the revaluation of the Company’s Canadian dollar denominated future income tax liability. This compares to an unrealized foreign exchange gain of $17.7 million in the comparable quarter of the previous year. The unrealized foreign exchange gain is not taxable for Canadian income tax purposes.

During the fourth quarter of fiscal 2009, the Company also recorded a non-cash impairment charge of $93.8 million in relation to the goodwill of Harry Winston’s retail segment. The impairment charge is not deductible for Canadian income tax purposes and is the primary cause of the unusual effective tax rate for the current quarter.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2028.

 

2009 ANNUAL REPORT 11

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

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

	Three months	Three months
	ended	ended
	January 31, 2009	January 31, 2008
Statutory income tax rate	31%	34%
Stock compensation	–%	(1)%
Northwest Territories mining royalty (net of income tax relief)	(1)%	6%
Impact of foreign exchange	–%	(11)%
Impact of changes in future income tax rates	–%	(12)%
Earnings subject to tax different than statutory rate	4%	(1)%
Changes in valuation allowance	(2)%	(4)%
Benefits of losses recognized through reduction of goodwill	–%	3%
Assessments and adjustments	2%	(15)%
Impact of impairment charge on goodwill	(44)%	–%
Other items	(1)%	(1)%
Effective income tax rate	(11)%	(2)%

Consolidated Interest and Financing Expenses

Interest and financing expenses of $5.0 million were incurred during the fourth quarter compared to $7.1 million during the comparable quarter of the prior year. The reduction in interest and financing expenses resulted from a combination of a reduction in debt levels in the mining segment and lower interest rates.

Consolidated Other Income

Other income of $0.8 million was recorded during the quarter compared to other income of $0.7 million in the comparable quarter of the prior year.

Consolidated Insurance Settlement

In December 2008, approximately $31.7 million in Company-owned and consigned retail inventory at cost was stolen during a second robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $16.7 million in the fourth quarter on settlement of the insurance claim compared to a fourth quarter pre-tax gain of $13.5 million on the first Paris salon robbery that occurred in the third quarter of the prior year. The remaining balance of the insurance claim is $3.3 million, of which $1.0 million was received in February 2009; the insurance company has agreed to pay the balance of $2.3 million which is expected to be received during April 2009. Also included in insurance settlement is a $0.5 million gain resulting from an excavator fire that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine.

Consolidated Impairment Charge

The Company tested goodwill for impairment and determined that the carrying value of its retail segment is below its fair value as described on page 20. The Company recorded a non-cash goodwill impairment charge of $93.8 million during the fourth quarter.

Consolidated Foreign Exchange Gain

A net foreign exchange gain of $4.6 million was recognized during the quarter compared to a net foreign exchange gain of $22.3 million in the comparable quarter of the prior year. The gains relate principally to the revaluation of the Company’s Canadian dollar denominated long-term future income tax liability as a result of the weakening of the Canadian dollar against the US dollar at year end. The Company’s ongoing currency exposure relates primarily to expenses and obligations incurred in Canadian dollars, as well as the revaluation of certain Canadian monetary balance sheet amounts. The Company does not currently have any significant derivative instruments outstanding.

 

12 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

SEGMENTED ANALYSIS

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

Mining

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

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

		2009		2009		2009		2009		2008		2008		2008		2008		2009		2008		2007
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Sales	$	51,100	$	90,716	$	105,014	$	81,393	$	103,238	$	122,711	$	105,071	$	82,752	$	328,223	$	413,772	$	332,573
Cost of sales		34,612		40,617		32,390		32,150		36,962		45,985		46,217		40,516		139,769		169,680		166,879
Gross margin		16,488		50,099		72,624		49,243		66,276		76,726		58,854		42,236		188,454		244,092		165,694
Gross margin (%)		32.3%		55.2%		69.2%		60.5%		64.2%		62.5%		56.0%		51.0%		57.4%		59.0%		49.8%
Selling, general and administrative expenses		4,430		3,114		5,151		7,208		5,663		6,748		5,861		5,087		19,903		23,359		21,222
Earnings from operations	$	12,058	$	46,985	$	67,473	$	42,035	$	60,613	$	69,978	$	52,993	$	37,149	$	168,551	$	220,733	$	144,472

Year Ended January 31, 2009 Compared to Year Ended January 31, 2008

Mining Sales

Rough diamond sales for the year totalled $328.2 million compared to $413.8 million in the prior year resulting primarily from lower carat production. The Company’s share of rough diamond production during the calendar year decreased 23% to 3.7 million carats compared to the prior year. The lower production resulted from the negative grade variation in the A-154 South pipe combined with the mining of low grade, mud-rich material from the top of the A-418 pipe and a higher volume of A-418 ore being processed due to challenging mining conditions in the lower benches of the A-154 pit.

The Company held nine primary rough diamond sales, one of which was an open-market tender, during the fiscal year compared to ten in 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 Diamond Mine, the number of primary and secondary sales events conducted at each sales location during the year, rough diamond prices and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine in each year.

Mining Cost of Sales and Gross Margin

The Company’s cost of sales for the fiscal year was $139.8 million for a gross margin of 57.4% compared to $169.7 million cost of sales and gross margin of 59.0% in the prior year. The decrease in the gross margin percentage resulted primarily from lower production.

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

Mining Selling, General and Administrative Expenses

SG&A expenses for the mining segment decreased by $3.5 million from the prior year primarily due to a mark-to-market reduction to stock-based compensation and a reduction in discretionary spending.

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

Mining Sales

Rough diamond sales for the quarter totalled $51.1 million compared to $103.2 million in the comparable quarter of the prior year resulting from a combination of lower carat production and a softening of the rough diamond market, leading to lower sales volumes and prices. Rough diamond production decreased 12% in the fourth calendar quarter from the prior year. The lower production resulted from the negative grade variation in the A-154 South pipe combined with a higher volume of A-418 ore being processed due to challenging mining conditions in the lower benches of the A-154 pit.

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

 

2009 ANNUAL REPORT 13

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

Mining Cost of Sales and Gross Margin

The Company’s fourth quarter cost of sales was $34.6 million for a gross margin of 32.3% compared to $37.0 million cost of sales and gross margin of 64.2% in the comparable quarter of the prior year. The decrease in the gross margin percentage was driven by lower carat production and lower prices. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.

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

Mining Selling, General and Administrative Expenses

SG&A expenses for the mining segment decreased by $1.2 million from the comparable period of the prior year primarily due to a reduction in discretionary spending.

Retail

The retail segment includes sales from Harry Winston’s 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 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			2009		2009			2008			2008			2008		2008			2009			2008			2007
		Q4			Q3			Q2		Q1			Q4			Q3			Q2		Q1			Total			Total			Total
Sales	$	67,299		$	57,907		$	81,105	$	74,686		$	84,957		$	53,767		$	68,198	$	58,613		$	280,997		$	265,535		$	226,220
Cost of sales		34,296			31,062			41,152		40,999			46,675			28,606			35,610		30,616			147,509			141,507			118,619
Gross margin		33,003			26,845			39,953		33,687			38,282			25,161			32,588		27,997			133,488			124,028			107,601
Gross margin (%)		49.0%			46.4%			49.3%		45.1%			45.1%			46.8%			47.8%		47.8%			47.5%			46.7%			47.6%
Selling, general and administrative expenses		34,969			30,884			34,043		36,077			39,831			28,791			29,340		29,124			135,973			127,086			105,314
Earnings (loss) from operations	$	(1,966	)	$	(4,039	)	$	5,910	$	(2,390	)	$	(1,549	)	$	(3,630	)	$	3,248	$	(1,127	)	$	(2,485	)	$	(3,058	)	$	2,287

Year Ended Ended January 31, 2009 Compared to Year Ended January 31, 2008

Retail Sales

Sales for the fiscal year ending January 31, 2009 were $281.0 million compared to $265.5 million for the prior year. Sales in the European market increased 44% to $117.6 million, US sales decreased 16% to $94.0 million, and Asian sales decreased 3% to $69.4 million.

Retail Cost of Sales and Gross Margin

Cost of sales for Harry Winston Inc. for the fiscal year was $147.5 million compared to $141.5 million for the prior year. Gross margin for the fiscal year was $133.5 million or 47.5% compared to $124.0 million or 46.7% for the prior year. Excluding the impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin for the fiscal year and the prior year would have been 49.4% and 50.3%, respectively. This decrease in gross margin is the result of the product mix sold, in particular a lower proportion of higher-margin sales in the Japanese market, an increased contribution of high dollar value transactions which carry lower-than-average gross margins, and higher research and development costs to support the growing watch business.

Retail  Selling, General and Administrative Expenses

SG&A expenses increased to $136.0 million for the fiscal year as compared to $127.1 million in the prior year. However, SG&A as a percentage of sales remained at 48% for the fiscal year consistent with the prior year. The increase of $8.9 million in SG&A expenses from the prior year is primarily due to an increase of $4.0 million in insurance premiums, $3.3 million in amortization expense, $3.1 million in rent and building related expenses, $0.6 million in salaries and benefits, offset by a decrease of $3.0 million in advertising and selling expenses. Included in these amounts was 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 $12.6 million compared to $9.3 million in the comparable period of the prior year.

14 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Retail Sales

Sales for the fourth quarter were $67.3 million compared to $85.0 million for the comparable quarter of the prior year, a decrease of 21%. Sales in the European market increased 77% to $30.9 million. US sales decreased 60% to $18.8 million, and Asian sales decreased 16% to $17.6 million.

Retail Cost of Sales and Gross Margin

Cost of sales for Harry Winston Inc. for the fourth quarter was $34.3 million compared to $46.7 million for the comparable quarter of the prior year. Gross margin for the quarter was $33.0 million or 49.0% compared to $38.3 million or 45.1% for the fourth quarter of the prior year. Excluding the impact of sales of Harry Winston Inc. pre-acquisition inventory, gross margin for the fourth quarter and the comparable quarter of the prior year would have been 50.1% and 47.4%, respectively. Gross margin in the fourth quarter of the prior year was impacted by a significant sale of a wide range of jewelry items to the Russian market, which generated a lower than average gross margin. This sale was made to increase awareness of the Harry Winston brand in this market, where demand for luxury brands has grown rapidly over the past several years.

Retail  Selling, General and Administrative Expenses

SG&A expenses decreased to $35.0 million from $39.8 million in the comparable quarter of the prior year. The decrease was due to a combination of reduced advertising and selling expenses and an adjustment to an equity-related compensation program resulting from the non-cash goodwill impairment charge on the carrying value of the retail segment. SG&A expenses include depreciation and amortization expense of $3.2 million, consistent with the comparable quarter of the prior year. SG&A as a percentage of sales increased to 52% compared to 47% in the comparable quarter of the prior year.

OPERATIONAL UPDATE

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

Mining Segment

Annual production at the Diavik Diamond Mine reached 9.2 million carats for the calendar year ended December 31, 2008, representing a decrease of 23% over the prior year. The lower production resulted from a local grade decrease compared to the reserve grade in a part of the A-154 South pipe combined with the mining of low grade, mud-rich material from the top of the A-418 pipe. A higher volume of A-418 ore was processed compared to plan due to challenging mining conditions in the lower benches of the A-154 pit.

During the fourth quarter of 2008, the Diavik Diamond Mine reached a milestone of 50 million carats produced. Ore production for the fourth calendar quarter consisted of 1.5 million carats produced from 0.29 million tonnes of ore from the A-154 South kimberlite pipe, and 1.1 million carats produced from 0.28 million tonnes from the A-418 kimberlite pipe.

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

	Three months	Three months	Twelve months	Twelve months
	ended	ended	ended	ended
	December 31,	December 31,	December 31,	December 31,
	2008	2007	2008	2007
Diamonds recovered (000s carats)	1,039	1,177	3,690	4,777
Grade (carats/tonne)	4.56	5.06	3.82	4.97

Retail Segment

For the fiscal year, the retail segment generated growth in sales of 6% over the prior year period. Strong sales to clients in the Middle East, Russia and Asia outside of Japan compensated for weaker sales in the US and Japan. A new salon was opened in Costa Mesa, California in August 2008.

For the fourth quarter, the retail segment recorded a 21% decline in sales over the comparable quarter of the prior year. Weak sales in the US and Japan were primarily responsible for the overall decrease in sales. Harry Winston Inc. operated a network of 18 retail salons during the current year. The retail segment has implemented a series of measures in response to the global recession, including cost reduction initiatives, close monitoring of inventory levels and a very selective expansion of the retail salon distribution network.

 

2009 ANNUAL REPORT 15

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

As at January 31, 2009, Harry Winston Diamond Corporation had unrestricted cash and cash equivalents of $16.7 million and contingency cash collateral and reserves of $30.1 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 $14.1 million and short-term investments of $2.6 million at January 31, 2009. The short-term investments were held in overnight deposits. Total cash resources at January 31, 2009 were $28.3 million lower than $75.2 million at January 31, 2008, resulting from additional joint venture cash calls to support the development of underground mining and debt repayments.

During the year ended January 31, 2009, the Company generated $144.1 million in cash from operations, compared to $193.9 million in the prior year.

Working capital decreased to $195.1 million at January 31, 2009 from $220.0 million at January 31, 2008. During the fiscal year, the Company increased accounts receivable by $43.3 million, most of which related to an insurance settlement receivable resulting from the Paris salon robbery (which was received in February 2009), decreased prepaid expenses and other current assets by $8.2 million, increased inventory by $24.0 million, decreased accounts payable and accrued liabilities by $4.5 million, and increased income taxes payable by $39.1 million.

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

The Company’s mining and retail segments maintain separate financing arrangements. Accordingly, the Company assesses liquidity and capital resources on a segmented basis. The retail segment’s cash requirements are for cash operating expenses, working capital and capital expenditures, including salon expansion. The Company believes that cash on hand, cash generated from operations and access to credit facilities will be sufficient to meet anticipated cash requirements for the retail segment next fiscal year.

The mining segment’s cash requirements are for cash operating expenses, working capital and capital expenditures. With the closing of the Kinross transaction, the Company believes that cash on hand and cash generated from the sale of rough diamonds will be sufficient to meet anticipated cash requirements for the next fiscal year.

Financing Activities

During the fiscal year, Harry Winston Diamond Corporation repaid $52.2 million of its senior secured term facilities. At January 31, 2009, the Company had $24.2 million outstanding on its senior secured term credit facilities and $50.0 million outstanding on its senior secured revolving credit facility. With the closing of the Kinross transaction, all amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009.

On February 22, 2008, Harry Winston Inc. entered into a new credit agreement with a syndicate of banks for a $250.0 million, five-year revolving credit facility. As at January 31, 2009, Harry Winston Inc. had $179.6 million outstanding on its $250.0 million secured five-year revolving credit facility, which is used to fund salon inventory and capital expenditure requirements. This represents an increase of $25.6 million from the amount outstanding at January 31, 2008.Also included in long-term debt of the Company’s retail operations is a 25-year loan agreement for $15.0 million (17.5 million CHF) used to finance the construction of the new watch factory in Geneva, Switzerland. At January 31, 2009, $14.7 million had been drawn against the facility compared to $16.1 million at January 31, 2008. The bank has a secured interest in the factory building. On June 26, 2008, the bank further extended a demand credit facility for 2.0 million CHF. The new facility is supported by a $2.0 million standby letter of credit. At January 31, 2009, $0.5 million was drawn against this demand credit facility.

Harry Winston Japan, K.K. maintains secured and unsecured credit agreements with three banks amounting to $23.1 million (¥2,075 million). At January 31, 2009, $23.1 million had been drawn against these facilities, $5.5 million of which is long term, payable on June 28, 2010, with the balance of $17.6 million classified as bank advances.

16 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

At January 31, 2009, $18.4 million, $4.7 million and $1.5 million were drawn under the Company’s revolving financing facilities relating to its Belgian subsidiary, Harry Winston Diamond International N.V., its Israeli subsidiary, Harry Winston Diamond (Israel) Limited and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively.

During the fiscal year, the Company made dividend payments of $12.3 million or $0.20 per share to its shareholders.

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

Investing Activities

During the fiscal year, the Company purchased capital assets of $209.9 million, of which $200.3 million were purchased for the mining segment and $9.6 million for the retail segment.

Contractual Obligations

The Company has contractual payment obligations with respect to long-term debt and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, the Company is obligated to fund 40% of the Joint Venture’s total expenditures on a monthly basis. Harry Winston Diamond Corporation’s current projected share of the planned capital expenditures at the Diavik Diamond Mine, which are not reflected in the table below, including capital expenditures for the calendar years 2009 to 2013, is approximately $170 million assuming a Canadian/US average exchange rate of $0.86 for the five years. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:

CONTRACTUAL OBLIGATIONS				Less than		Year		Year		After
(expressed in thousands of United States dollars)		Total		1 year		2–3		4–5		5 years
Long-term debt (a)(b)	$	245,198	$	9,488	$	26,799	$	192,135	$	16,776
Environmental and participation agreements incremental commitments (c)		77,345		64,243		2,609		1,011		9,482
Operating lease obligations (d)		106,064		17,701		26,280		16,865		45,218
Capital lease obligations (e)		1,389		844		545		–		–
Total contractual obligations	$	429,996	$	92,276	$	56,233	$	210,011	$	71,476

(a) Long-term debt presented in the foregoing table includes current and long-term portions. The mining segment’s credit agreements are comprised of two senior secured term credit facilities and a senior secured revolving credit facility. The existing facilities had a maturity date of December 15, 2009. At January 31, 2009, $24.2 million in total was outstanding on the senior secured term credit facilities, and $50.0 million was outstanding on the senior secured revolving credit facility. With the closing of the Kinross transaction, these amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009.

The Company’s first mortgage on real property has scheduled principal payments of approximately $0.1 million quarterly, and may be prepaid after 2009. On January 31, 2009, $6.8 million was outstanding on the mortgage payable.

On February 22, 2008, Harry Winston Inc. entered into a new credit agreement with a syndicate of banks for a $250.0 million, five-year revolving credit facility. There are no scheduled repayments required before maturity. At January 31, 2009, $179.6 million had been drawn against this secured credit facility which expires on March 31, 2013.

Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for $15.0 million (17.5 million CHF) used to finance the construction of the new watch factory in Geneva, Switzerland. The bank has a secured interest in the factory building. The loan agreement is comprised of a 3.5 million CHF loan and a 14.0 million CHF loan. The 3.5 million CHF loan bears interest at a rate of 3.9% and matures on April 22, 2010. The 14.0 million CHF loan bears interest at a rate of 3.55% and matures on January 31, 2033. Quarterly payments on the loan began on June 30, 2008. At January 31, 2009, $14.7 million was outstanding on these loan agreements. On June 26, 2008, the bank further extended a demand credit facility for 2.0 million CHF. The new facility is supported by a $2.0 million standby letter of credit and bears interest at a rate of 5.0% per annum. At January 31, 2009, $0.5 million was drawn against the demand credit facility.

2009 ANNUAL REPORT 17

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

	Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks each amounting to $8.4 million (¥750 million). At January 31, 2009, $16.8 million had been drawn against these facilities, $5.5 million of which is long term, with the balance of $11.3 million classified as bank advances. The short-term portion of the credit facilities bear interest at 1.98% and expire on April 30, 2009, and June 1, 2009, respectively. The long-term portion bears interest at 2.38% and expires on June 28, 2010. Harry Winston Inc. has also entered into a credit agreement to provide a credit facility to Harry Winston Japan, K.K. secured solely by the inventory of Harry Winston Japan, K.K. in an amount of $6.4 million (¥575 million). This facility bears interest at 2.30% and expires on June 19, 2009.
(b)	Interest on long-term debt is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at January 31, 2009 and have been included under long-term debt in the table above. Interest payments for fiscal 2010 are approximated to be $8.5 million.
(c)	The Joint Venture, under environmental and other agreements, must provide funding for the Environmental Monitoring Advisory Board. These agreements also state the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. The Joint Venture has fulfilled its obligations for the security deposits by posting letters of credit of which Harry Winston Diamond Corporation’s share as at January 31, 2009 was $61.4 million based on the Company’s 40% ownership interest in the Diavik Diamond Mine. Following the closing of the transaction with Kinross of an indirect interest in the Diavik Diamond Mine as described on page 19, the Company will effectively have a 31% economic interest in the Diavik Diamond Mine. The requirement to post security for the reclamation and abandonment obligations may be reduced to the extent of amounts spent by the Joint Venture on those activities. The Joint Venture has also signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of area Aboriginal bands. The actual cash outlay for the Joint Venture’s obligations under these agreements is not anticipated to occur until later in the life of the Diavik Diamond Mine.
(d)	Operating lease obligations represent future minimum annual rentals under non-cancellable operating leases for Harry Winston salons and office space. Harry Winston Inc.’s New York salon lease expires on December 17, 2010 with an option to renew.
(e)	Capital lease obligations represent future minimum annual rentals under non-cancellable capital leases for Harry Winston Inc. retail exhibit space.

OUTLOOK

Mining

A mine plan and budget for calendar 2009 was approved in the fourth quarter of calendar 2008 by both Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. However, as a result of the weakness in the diamond industry and the global credit markets, significant changes to this mine plan and budget are expected. On March 30, 2009, DDMI announced that it plans to take a series of actions to preserve the strength of the Diavik Diamond Mine during the challenging global market conditions. These actions include two production shutdowns, further deferral of the start of underground mine production, and accelerating the planned transition to a smaller work force.

Summer and winter production shutdowns of six weeks each in duration will be implemented. During these shutdowns diamond production will cease and the mine will be placed on a care and maintenance schedule. The summer shutdown is scheduled for July 14, 2009 to August 24, 2009 inclusive. The winter shutdown is scheduled for December 1, 2009 to January 11, 2010 inclusive. Approximately 500 full-time equivalent positions will be affected by the shutdowns, with affected workers being provided with a number of options to fit their circumstances.

Additional actions include placing the underground mine on care and maintenance by the third quarter of 2009, once the majority of its construction is complete. Diavik Diamond Mine will also be accelerating the process of employee reductions required for a fully operational underground mine. This will be achieved primarily by natural attrition.

These actions will reduce operating expenditures, defer a significant amount of underground capital expenditures and reduce carat production in calendar 2009 to ensure that the operation is well positioned for the future. The operational plan for the Diavik Diamond Mine will remain flexible for the balance of this calendar year to maintain the ability to respond to changing diamond market conditions. Further details of the plan are expected to be available by the end of April 2009.

18 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

Retail

Harry Winston Inc. expects sales in the luxury diamond jewelry industry to continue to be negatively impacted by economic conditions through at least the first half of the fiscal year. The Company has implemented a series of cost reduction measures to align its cost structure with the realities of the economy. The strength of the Harry Winston brand and international distribution network has positioned the Company to withstand the unprecedented economic challenges currently being faced throughout the world. Harry Winston Inc. will continue to focus on providing our customers with the highest level of quality and service in our industry.

Notwithstanding the current economic conditions, Harry Winston Inc. will continue its plan to strengthen its brand and expand its retail salon network and product offering over the next several years. To that end, one salon is planned to be opened in Singapore during in fiscal 2010.

DIVIDEND

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

SUBSEQUENT EVENT

On March 19, 2009, the Company announced a strategic investment by Kinross Gold Corporation, whereby Kinross will make a net investment of $150.0 million to acquire an indirect interest in the Diavik Diamond Mine and a direct equity stake in the Company. Kinross will subscribe for 15.2 million of the Company’s treasury shares at a price of $3.00 per share, being approximately 19.9% of the Company’s issued equity post the transaction. Kinross will also subscribe for new partnership units representing a 22.5% interest in the limited partnership which holds the Company’s 40% ownership interest in the Diavik Diamond Mine, for a net effective subscription value of $104.4 million. The transaction closed on March 31, 2009 and the Company’s economic interest in the Diavik Diamond Mine is now 31%. With the closing of the Kinross transaction, all amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009. If the transaction had closed on January 31, 2009, the Company would have recorded a non-cash dilution loss of approximately $30 million in respect of its interest in the Diavik Diamond Mine.

DISCLOSURE CONTROLS AND PROCEDURES

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

The management of Harry Winston Diamond Corporation has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by the Annual Report. Based on that evaluation, management has concluded that these disclosure controls and procedures, as defined in Canada by Multilateral Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are effective as of January 31, 2009 to ensure that information required to be disclosed in reports that the Company will file or submit under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in those rules and forms.

INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Management has evaluated the effectiveness of internal control over financial reporting using the framework and criteria established in the Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that internal control over financial reporting was effective as of January 31, 2009.

 

2009 ANNUAL REPORT 19

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fourth quarter of fiscal 2009 there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

CRITICAL ACCOUNTING ESTIMATES

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

Goodwill

The Company tests goodwill for impairment on an annual basis as of January 31 of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of the retail reporting unit below its carrying amount. The Company’s goodwill relates to its retail segment, which was acquired through its purchase of Harry Winston Inc.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of the reporting unit with its carrying amount, including goodwill allocated to the reporting unit. Measurement of the fair value of the reporting unit is based on the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The Company determined the fair value of the retail reporting unit using the discounted cash flow as the primary methodology. To support the fair value conclusion based on the discounted cash flow method the Company compared the implied multiples of enterprise value to revenue and enterprise value to EBITDA to those multiples for comparable publicly traded companies and acquisition transactions for comparable companies. These approaches involve significant management judgment.

If the carrying amount of the reporting unit exceeds its fair value, step two requires that the fair value of the reporting unit be allocated to the underlying assets and liabilities of that reporting unit, whether or not previously recognized, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, a non-cash impairment charge equal to the excess is recorded in earnings.

The significant adverse changes in the global business climate that began in the third quarter of fiscal 2009 have worsened, resulting in a deterioration in the operating environment for the Company’s retail segment. This has resulted in adverse changes to the Company’s financial forecasts for the retail reporting unit. As at January 31, 2009, the Company determined that the fair value of the retail reporting unit was less than its carrying value and a non-cash goodwill impairment charge of $93.8 million was made during the fourth quarter. This charge eliminates the goodwill recorded on the acquisition of Harry Winston Inc.

Use of Estimates

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

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

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

20 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

Deferred Mineral Property Costs and Mineral Reserves

Harry Winston Diamond Corporation capitalizes all direct development and pre-production costs relating to mineral properties and amortizes such costs on a unit-of-production basis upon commencement of commercial production relating to the underlying property. Deferred mineral property costs are amortized based on estimated proven and probable reserves at the property.

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

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

Future Site Restoration Costs

The Company has obligations for future site restoration costs. The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. As at January 31, 2009, estimates of all legal obligations at the joint venture level have been included in the consolidated financial statements of the Company. Processes to track and monitor these obligations are carried out at the joint venture level.

Intangible Assets

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

RISKS AND UNCERTAINTIES

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

Nature of Mining

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

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

 

2009 ANNUAL REPORT 21

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

Nature of Joint Arrangement with DDMI

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

Agreement with Kinross

Under the amended partnership agreement of Harry Winston Diamond Limited Partnership, the general partner is entitled to request that the partners in the partnership advance funds to the partnership pro rata based on their holdings of partnership units for the purpose of satisfying the partnership’s obligations under various contractual commitments, including those deriving from the joint arrangement between DDMI and the partnership. The partners may unanimously determine to fund any cash call by way of a loan rather than equity contribution. If a partner fails to contribute its proportion of funds with respect to a cash call, the non-defaulting partner or partners will have the option, but not the obligation, to fund the defaulting partner’s portion of the cash call by way of equity contribution or loan or a combination of the two; provided that if any equity contribution is made, the non-defaulting partner’s interest in the partnership will be increased proportionately through the issuance of additional partnership units.

As DDMI, under the joint arrangement between DDMI and the partnership, is able to determine the timing and scope of future project capital expenditures and to impose capital expenditure requirements on the Company that the Company may not have sufficient cash to meet, the Company’s interest in the partnership could be diluted under the amended partnership agreement as a failure by the Company to meet cash call requirements imposed by the amended partnership agreement which could result in the Company’s interest in the partnership being diluted.

Diamond Prices and Demand for Diamonds

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

Cash Flow and Liquidity

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

Economic Environment

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

22 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

Currency Risk

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

Licenses and Permits

The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licenses and permits from the Canadian government. Renewal of the Diavik Diamond Mine Type “A” Water License was granted by the regional Wek’eezhii Land and Water Board on November 1, 2007 for an eight-year period. While the Company anticipates that DDMI, which is also the operator of the Diavik Diamond Mine, will be able to renew this license and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licenses and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property.

Regulatory and Environmental Risks

The operation of the Diavik Diamond Mine, exploration activities at the Diavik Project and the manufacturing of jewelry and watches are subject to various laws and regulations governing the protection of the environment, exploration, development, production, taxes, labour standards, occupational health, waste disposal, mine safety, manufacturing safety and other matters. New laws and regulations, amendments to existing laws and regulations, or more stringent implementation or changes in enforcement policies under existing laws and regulations could have a material adverse impact on the Company by increasing costs and/or causing a reduction in levels of production from the Diavik Diamond Mine and in the manufacture of jewelry and watches. As well, as the Company’s international operations expand, it or its subsidiaries become subject to laws and regulatory regimes which differ materially from those under which they operate in Canada and the US.

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

Climate Change

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

Resource and Reserve Estimates

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

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

 

2009 ANNUAL REPORT 23

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS


Insurance

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

Fuel Costs

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

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

Reliance on Skilled Employees

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

The Company’s success at marketing rough diamonds and in operating the business of Harry Winston Inc. is dependent on the services of key executives and skilled employees, as well as the continuance of key relationships with certain third parties, such as diamantaires. The loss of these persons or the Company’s inability to attract and retain additional skilled employees or to establish and maintain relationships with required third parties may adversely affect its business and future operations in marketing diamonds and in operating its retail segment.

Expansion of the Existing Salon Network

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

Competition in the Luxury Jewelry Segment

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

CHANGES IN ACCOUNTING POLICIES

Capital Disclosures

Effective February 1, 2008, the Company adopted new accounting recommendations from the Canadian Institute of Chartered Accountants (“CICA”), Handbook Section 1535, “Capital Disclosures”. This new standard specifies the requirements for disclosure of both qualitative and quantitative information to enable users of financial statements to evaluate the Company’s objectives, policies and processes for managing capital. This disclosure is contained in note 17 to the consolidated financial statements.

Inventories

Effective February 1, 2008, the Company adopted new accounting recommendations from the CICA, Handbook Section 3031, “Inventories”, which supersedes the previously issued standard on inventory. The new standard introduces significant changes to the measurement and disclosure of inventory. The measurement changes include: the elimination of LIFO, the requirement to measure inventories at the lower of cost and net realizable value for inventories that are not ordinarily interchangeable and goods or services produced for specific purposes, the requirement for an entity to use a consistent cost formula for inventory of a similar nature and use, and the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. Disclosures of inventories have also been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are required to be disclosed. This standard has had no material impact on the consolidated financial statements.

24 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
 

Financial Instruments

Effective February 1, 2008, the Company adopted new accounting recommendations from the CICA, Handbook Section 3862, “Financial Instruments – Disclosures” and Handbook Section 3863, “Financial Instruments – Presentation”. Section 3862 provides guidance on disclosure of risks associated with both recognized and unrecognized financial instruments and how the Company manages these risks. Section 3863 details financial instruments presentation requirements, which are unchanged from those discussed in Section 3861, “Financial Instruments – Disclosure and Presentation”. This disclosure is contained in notes 18 and 19 to the consolidated financial statements.

RECENTLY ISSUED ACCOUNTING STANDARDS

Goodwill and Intangibles

On February 1, 2008 the CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”. This Section establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The changes are effective for interim and annual financial statements beginning January 1, 2009. The Company is currently assessing the impact of this standard on its consolidated financial statements.

International Financial Reporting Standards (“IFRS”)

In February 2008, the Canadian Accounting Standards Board confirmed that publically accountable enterprises will be required to adopt IFRS in place of Canadian Generally Accepted Accounting Principles (GAAP) for financial periods beginning on or after January 1, 2011. Accordingly, commencing February 1, 2011 the Company will convert over to IFRS and prepare its first financial statements in accordance with IFRS for the three month period ended April 30, 2011, with comparative information also prepared under IFRS.

The conversion project from Canadian GAAP to IFRS is led by finance management, and will include representatives from various areas of the Company as necessary to plan for and achieve a smooth transition. The Company has engaged the services of a third party expert advisor to assist. Regular progress reporting to senior management and to the Audit Committee on the status of the IFRS conversion project has been instituted. The conversion project consists of three phases:

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

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

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

The Company is currently in the assessment phase of its IFRS conversion project and expects this phase to be completed during the second quarter of fiscal 2010. The Company cannot at this time reasonably estimate the impact of adopting IFRS on its consolidated financial statements.

OUTSTANDING SHARE INFORMATION

As at January 31, 2009
Authorized	Unlimited
Issued and outstanding shares	61,372,092
Options outstanding	1,604,338
Fully diluted	62,976,430

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.

 

2009 ANNUAL REPORT 25

HARRY WINSTON DIAMOND CORPORATION

Management’s Responsibility for Financial Information

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

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

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

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

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

Robert A. Gannicott Chief Executive Officer	Alan S. Mayne Chief Financial Officer

　

26 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

Shareholders’ Auditors’ Report

REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
To the Shareholders of Harry Winston Diamond Corporation

We have audited the consolidated balance sheets of Harry Winston Diamond Corporation (the "Company") as at January 31, 2009 and 2008 and the consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended January 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. With respect to the consolidated financial statements for the years ended January 31, 2009 and 2008, we also conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at January 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the two-year period ended January 31, 2009 in accordance with Canadian generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
TORONTO, CANADA
APRIL 16, 2009

 

2009 ANNUAL REPORT 27

HARRY WINSTON DIAMOND CORPORATION

Report on Internal Control over Financial Reporting

To the Shareholders and Board of Directors of Harry Winston Diamond Corporation

We have audited Harry Winston Diamond Corporation’s (the "Company") internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management’s Discussion and Analysis". Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have conducted our audits on the consolidated financial statements in accordance with Canadian generally accepted auditing standards. With respect to the year ended January 31, 2009, we also have conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our report dated April 16, 2009 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
TORONTO, CANADA
APRIL 16, 2009

　

28 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

Consolidated Balance Sheets
(expressed in thousands of United States dollars)

As at January 31,		2009		2008
ASSETS
Current assets:
Cash and cash equivalents (note 3)	$	16,735	$	49,628
Cash collateral and cash reserves (note 3)		30,145		25,615
Accounts receivable (note 20)		66,980		25,505
Inventory and supplies (note 4)		346,235		322,228
Prepaid expenses and other current assets		48,130		58,617
		508,225		481,593
Mining capital assets (note 5)		800,358		658,200
Retail capital assets (note 5)		68,258		70,617
Intangible assets, net (note 8)		130,752		132,628
Goodwill (note 7)		–		93,780
Other assets (note 9)		15,644		16,167
Future income tax asset (note 11)		43,338		40,963
	$	1,566,575	$	1,493,948
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	118,390	$	124,426
Income taxes payable		76,987		48,118
Bank advances (note 10(ii))		42,621		34,928
Current portion of long-term debt (note 10)		75,097		54,137
		313,095		261,609
Long-term debt (note 10)		205,625		255,212
Future income tax liability (note 11)		303,284		370,500
Other long-term liability		1,946		1,730
Future site restoration costs (note 12)		39,506		32,980
Minority interest		280		255
Shareholders’ equity:
Share capital (note 13)		381,541		305,502
Contributed surplus		16,079		15,614
Retained earnings		283,177		225,334
Accumulated other comprehensive income		22,042		25,212
		702,839		571,662
Commitments and guarantees (note 15)
	$	1,566,575	$	1,493,948
See accompanying notes to consolidated financial statements.

ON BEHALF OF THE BOARD

Robert A Gannicott Director	Daniel Jarvis Director

2009 ANNUAL REPORT 29

HARRY WINSTON DIAMOND CORPORATION
 

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

Years ended January 31,		2009			2008
Sales	$	609,220		$	679,307
Cost of sales		287,278			311,187
Gross margin		321,942			368,120
Selling, general and administrative expenses		155,876			150,445
Earnings from operations		166,066			217,675
Interest and financing expenses		(20,457	)		(27,858	)
Other income		2,246			2,758
Insurance settlement (note 20)		17,240			13,488
Impairment charge		(93,780	)		–
Foreign exchange gain (loss)		59,087			(43,391	)
Earnings before income taxes		130,402			162,672
Income tax expense – Current (note 11)		81,787			47,516
Income tax expense (recovery) – Future (note 11)		(21,531	)		8,578
Earnings before minority interest		70,146			106,578
Minority interest		25			170
Net earnings	$	70,121		$	106,408
Earnings per share
Basic	$	1.15		$	1.82
Fully diluted (note 13)	$	1.15		$	1.81
Weighted average number of shares outstanding		61,013,758			58,369,338
See accompanying notes to consolidated financial statements.

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

Years ended January 31,		2009			2008
Net earnings	$	70,121		$	106,408
Other comprehensive income (loss)
Net gain (loss) on translation of net foreign operations (net of tax – nil)		(3,170	)		9,196
Total comprehensive income	$	66,951		$	115,604
See accompanying notes to consolidated financial statements.

30 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

Consolidated Statements of
Changes in Shareholders’ Equity
(expressed in thousands of United States dollars)

Years ended January 31,		2009			2008
COMMON SHARES:
Balance at beginning of year	$	305,502		$	305,165
Issued during the year		76,039			337
Balance at end of year		381,541			305,502
CONTRIBUTED SURPLUS:
Balance at beginning of year		15,614			14,922
Stock option expense		465			692
Balance at end of year		16,079			15,614
RETAINED EARNINGS:
Balance at beginning of year		225,334			165,625
Net earnings		70,121			106,408
Dividends paid		(12,278	)		(46,699	)
Balance at end of year		283,177			225,334
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year		25,212			16,016
Other comprehensive income (loss)
Net gain (loss) on translation of net foreign operations (net of tax – nil)		(3,170	)		9,196
Balance at end of year		22,042			25,212
Total shareholders’ equity	$	702,839		$	571,662
See accompanying notes to consolidated financial statements.

2009 ANNUAL REPORT 31

HARRY WINSTON DIAMOND CORPORATION

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

For the years ended January 31,		2009			2008
Cash provided by (used in):
OPERATING
Net earnings	$	70,121		$	106,408
Items not involving cash:
Amortization and accretion		76,970			81,174
Future income tax expense (recovery)		(21,531	)		8,578
Stock-based compensation and pension expense		683			2,422
Foreign exchange loss (gain)		(60,996	)		45,201
Loss on disposal of assets		494			–
Minority interest		25			170
Impairment charge		93,780			–
Change in non-cash operating working capital		(15,470	)		(50,069	)
		144,076			193,884
FINANCING
Decrease in long-term debt		(52,194	)		(19,637	)
Increase in revolving credit		191,799			52,722
Repayment of Harry Winston Inc. revolving credit		(159,109	)		–
Dividends paid		(12,278	)		(46,699	)
Issue of common shares		76,039			337
		44,257			(13,277	)
INVESTING
Cash collateral and cash reserve		(4,530	)		25,701
Mining capital assets		(200,289	)		(170,711	)
Retail capital assets		(9,574	)		(38,656	)
Other assets		(3,035	)		(2,115	)
		(217,428	)		(185,781	)
Foreign exchange effect on cash balances		(3,798	)		628
Decrease in cash and cash equivalents		(32,893	)		(4,546	)
Cash and cash equivalents, beginning of year (note 3)		49,628			54,174
Cash and cash equivalents, end of year (note 3)	$	16,735		$	49,628
Change in non-cash operating working capital
Accounts receivable		(43,311	)		(8,641	)
Prepaid expenses and other current assets		8,230			(32,756	)
Inventory and supplies		(24,007	)		(48,489	)
Accounts payable and accrued liabilities		4,470			9,622
Income taxes payable		39,148			30,195
	$	(15,470	)	$	(50,069	)
Supplemental cash flow information
Cash taxes paid	$	35,986		$	11,052
Cash interest paid	$	17,570		$	24,946
See accompanying notes to consolidated financial statements.

32 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

Notes to Consolidated Financial Statements

Years ended January 31, 2009 and 2008
(tabular amounts in thousands of United States dollars, except as otherwise noted)

NOTE 1:  NATURE OF OPERATIONS

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

At January 31, 2009, the Company’s most significant asset is a 40% ownership interest in the Diavik group of mineral claims. The Diavik Joint Venture (the “Joint Venture”) is an unincorporated joint arrangement between Diavik Diamond Mines Inc. (“DDMI”) (60%) and Harry Winston Diamond Limited Partership (40%). 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 Limited Partership is a wholly owned subsidiary of Harry Winston Diamond Corporation of Toronto, Canada. The Diavik Diamond Mine is located 300 kilometres northeast of Yellowknife in the Northwest Territories. The Company records its proportionate interest in the assets, liabilities and expenses of the Joint Venture in the Company’s financial statements with a one-month lag.

On March 19, 2009, the Company announced a strategic investment by Kinross Gold Corporation (“Kinross”), whereby Kinross will make a net investment of $150.0 million to acquire an indirect interest in the Diavik Diamond Mine and a direct equity stake in the Company. Kinross will subscribe for 15.2 million of the Company’s treasury shares at a price of $3.00 per share, being approximately 19.9% of the Company’s issued equity post the transaction. Kinross will also subscribe for new partnership units representing a 22.5% interest in the limited partnership which holds the Company’s 40% ownership interest in the Diavik Diamond Mine, for a net effective subscription value of $104.4 million. The transaction closed on March 31, 2009 and the Company’s economic interest in the Diavik Diamond Mine is now 31%. With the closing of the Kinross transaction, all amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009. If the transaction had closed on January 31, 2009, the Company would have recorded a non-cash dilution loss of approximately $30 million in respect of its interest in the Diavik Diamond Mine. With this transaction, the Company believes it will have sufficient resources to meet anticipated cash requirements for the next fiscal year.

The Company also owns a 100% interest in Harry Winston Inc., the premier fine jewelry and watch retailer. The results of Harry Winston Inc., located in New York City, US, are consolidated in the financial statements of the Company.

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

NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements are prepared by management in accordance with accounting principles generally accepted in Canada. The principal accounting policies presently followed by the Company are summarized as follows:

(a)

Principles of Consolidation

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

Subsidiaries

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

Joint Arrangements that Are Not Entitles ("Joint Arrangements")

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

2009 ANNUAL REPORT 33

HARRY WINSTON DIAMOND CORPORATION

(b)

Measurement Uncertainty

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

(c)

Revenue Recognition

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

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

(d)

Cash Resources

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

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

(e)

Trade Accounts Receivable

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

(f)

Inventory

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

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

For the prior year, supplies inventory was recorded at the lower of average cost or replacement value and includes consumables and spare parts to be maintained at the Diavik Diamond Mine site and at the Company’s sorting and distribution facility locations.

Effective February 1, 2008, the Company adopted new accounting recommendations from the CICA, Handbook Section 3031, “Inventories”, which supersedes the previously issued standard on inventory. Under the new standard, major spare parts are classified as capital assets and previous write-downs to net realizable value are reversed where there is a subsequent increase in the value of inventories. This standard has had no material impact on the consolidated financial statements.

(g)

Deferred Mineral Property Costs

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

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

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

34 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(h)

Capital Assets

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

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

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

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

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

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

(i)

Intangible Assets

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

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

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

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

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

(j)

Goodwill

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

2009 ANNUAL REPORT 35

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

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

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

(k)

Other Assets

Other assets include depreciable assets amortized over a period not exceeding ten years.

(l)

Future Site Restoration Costs

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

(m)

Foreign Currency Translation

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

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

(n)

Income and Mining Taxes

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

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

(o)

Stock-Based Compensation

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

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

(p)

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

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

36 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

(q)

Post Retirement Benefits

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

(r)

Financial Instruments

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

(s)

Basic and Diluted Earnings per Share

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

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

(t)

Impairment of Long-Lived Assets

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

(u)

Adoption of New Accounting Standards and Developments

Capital Disclosures

Effective February 1, 2008, the Company adopted new accounting recommendations from the Canadian Institute of Chartered Accountants (“CICA”), Handbook Section 1535, “Capital Disclosures”. This new standard specifies the requirements for disclosure of both qualitative and quantitative information to enable users of financial statements to evaluate the Company’s objectives, policies and processes for managing capital. This disclosure is contained in note 17 to the consolidated financial statements.

Inventories

Effective February 1, 2008, the Company adopted new accounting recommendations from the CICA, Handbook Section 3031, “Inventories”, which supersedes the previously issued standard on inventory. The new standard introduces significant changes to the measurement and disclosure of inventory. The measurement changes include: the elimination of LIFO, the requirement to measure inventories at the lower of cost and net realizable value for inventories that are not ordinarily interchangeable and goods or services produced for specific purposes, the requirement for an entity to use a consistent cost formula for inventory of a similar nature and use, and the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories. Disclosures of inventories have also been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are required to be disclosed. This standard has had no material impact on the consolidated financial statements.

2009 ANNUAL REPORT 37

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Financial Instruments

Effective February 1, 2008, the Company adopted new accounting recommendations from the CICA, Handbook Section 3862, “Financial Instruments – Disclosures” and Handbook Section 3863, “Financial Instruments – Presentation”. Section 3862 provides guidance on disclosure of risks associated with both recognized and unrecognized financial instruments and how the Company manages these risks. Section 3863 details financial instruments presentation requirements, which are unchanged from those discussed in Section 3861, “Financial Instruments – Disclosure and Presentation”. This disclosure is contained in notes 18 and 19 to the consolidated financial statements.

(v)

Recently Issued Accounting Standards

Goodwill and Intangibles

On February 1, 2008, the CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”. This Section establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The changes are effective for interim and annual financial statements beginning January 1, 2009. The Company is currently assessing the impact of this standard on its consolidated financial statements.

NOTE 3:  CASH RESOURCES

		2009		2008
Cash on hand and balances with banks	$	14,118	$	33,028
Short-term investments (a)		2,617		16,600
Total cash and cash equivalents		16,735		49,628
Cash collateral and cash reserves		30,145		25,615
Total cash resources	$	46,880	$	75,243

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

NOTE 4:  INVENTORY AND SUPPLIES

		2009		2008
Rough diamond inventory	$	31,872	$	17,097
Merchandise inventory		240,419		254,101
Supplies inventory		73,944		51,030
Total inventory and supplies	$	346,235	$	322,228

NOTE 5:  CAPITAL ASSETS

						2009						2008
				Accumulated		Net				Accumulated		Net
		Cost		amortization		book value		Cost		amortization		book value
MINING:
Deferred mineral property costs (a)	$	283,049	$	113,679	$	169,370	$	271,316	$	91,326	$	179,990
Diavik equipment and leaseholds (b)		776,638		171,571		605,067		586,208		136,771		449,437
Furniture, equipment and other (c)		7,912		4,814		3,098		5,383		3,783		1,600
Real property – land and building (d)		27,758		4,935		22,823		31,729		4,556		27,173
	$	1,095,357	$	294,999	$	800,358	$	894,636	$	236,436	$	658,200
RETAIL:
Furniture, equipment and other (c)	$	27,265	$	13,586	$	13,679	$	23,780	$	9,261	$	14,519
Real property – land and building (d)		72,686		18,107		54,579		66,016		9,918		56,098
	$	99,951	$	31,693	$	68,258	$	89,796	$	19,179	$	70,617

(a)	The Company holds a 40% ownership interest in the Diavik group of mineral claims, which contains commercially mineable diamond reserves. DDMI, a subsidiary of Rio Tinto plc, is the operator of the Joint Venture and holds the remaining 60% interest. The claims are subject to private royalties which are in the aggregate 2% of the value of production.
(b)	Diavik equipment and leaseholds are project related assets at the Joint Venture level.
(c)	Furniture, equipment and other includes equipment located at the Company’s diamond sorting facility and at Harry Winston Inc. salons.
(d)	Real property is comprised of land and a building that houses the corporate activities of the Company and various leasehold improvements to Harry Winston Inc. salons and corporate offices.

Amortization expense for 2009 was $71.8 million (2008 – $76.6 million).

 

38 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6:  DIAVIK JOINT VENTURE

The following represents Harry Winston Diamond Corporation’s 40% proportionate interest in the Joint Venture as at December 31, 2008 and 2007:

		2009			2008
Current assets	$	105,612		$	110,199
Long-term assets		754,886			605,300
Current liabilities		38,808			40,631
Long-term liabilities and participant’s account		821,690			674,868
YEAR ENDED:
Expenses net of interest income of $0.3 million and an insurance settlement of $0.5 million
(2008 – interest income of $0.5 million) (a)		187,839			177,049
Cash flows resulting from (used in) operating activities		(121,955	)		(121,440	)
Cash flows resulting from financing activities		292,208			290,615
Cash flows resulting from (used in) investing activities		(183,552	)		(165,645	)

(a)

The Joint Venture only earns interest income.

The Company is contingently liable for the other participant’s portion of the liabilities of the Joint Venture and to the extent the Company’s participating interest has increased because of the failure of the other participant to make a cash contribution when required, the Company would have access to an increased portion of the assets of the Joint Venture to settle these liabilities.

NOTE 7:   GOODWILL

The Company tests goodwill for impairment on an annual basis as of January 31 of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of the retail reporting unit below its carrying amount. The Company’s goodwill relates to its retail segment, which was acquired through its purchase of Harry Winston Inc.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of the reporting unit with its carrying amount, including goodwill allocated to the reporting unit. Measurement of the fair value of the reporting unit is based on the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The Company determined the fair value of the retail reporting unit using the discounted cash flow as the primary methodology. To support the fair value conclusion based on the discounted cash flow method the Company compared the implied multiples of enterprise value to revenue and enterprise value to EBITDA to those multiples for comparable publicly traded companies and acquisition transactions for comparable companies. These approaches involve significant management judgment.

If the carrying amount of the reporting unit exceeds its fair value, step two requires that the fair value of the reporting unit be allocated to the underlying assets and liabilities of that reporting unit, whether or not previously recognized, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, a non-cash impairment charge equal to the excess is recorded in earnings.

The significant adverse changes in the global business climate that began in the third quarter of fiscal 2009 have worsened, resulting in a deterioration in the operating environment for the Company’s retail segment. This has resulted in adverse changes to the Company’s financial forecasts for the retail reporting unit. As at January 31, 2009, the Company determined that the fair value of the retail reporting unit was less than its carrying value and a non-cash goodwill impairment charge of $93.8 million was made during the fourth quarter. This charge eliminates the goodwill recorded on the acquisition of Harry Winston Inc.

NOTE 8:  INTANGIBLE ASSETS

	Amortization				Accumulated
	period		Cost		amortization		2009 net		2008 net
Trademark	indefinite life	$	112,995	$	–	$	112,995	$	112,995
Drawings	indefinite life		12,365		–		12,365		12,365
Wholesale distribution network	120 months		5,575		1,926		3,649		4,206
Store leases	65 to 105 months		5,639		3,896		1,743		3,062
Intangible assets		$	136,574	$	5,822	$	130,752	$	132,628

Amortization expense for 2009 was $1.9 million (2008 – $1.7 million). The Company completed a valuation of its trademark and drawings as of January 31, 2009 and concluded that there was no impairment of these assets.

 

2009 ANNUAL REPORT 39

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 9:  OTHER ASSETS

		2009		2008
Prepaid pricing discount (a), net of accumulated amortization of $6.0 million (2008 – $4.6 million)	$	6,000	$	7,440
Other assets		2,391		2,512
Refundable security deposits		7,253		6,215
	$	15,644	$	16,167

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

NOTE 10:  LONG - TERM DEBT AND BANK ADVANCES

(i)

Long-Term Debt

		2009			2008
Credit facility (a)	$	74,107		$	125,677
Harry Winston Inc. credit facilities (b)		199,846			174,850
First mortgage on real property		6,769			8,822
Total long-term debt		280,722			309,349
Less current portion		(75,097	)		(54,137	)
	$	205,625		$	255,212

(a)

CREDIT FACILITY

The Company’s credit agreement includes two senior secured term facilities and a senior secured revolving facility with a maturity date of December 15, 2009. With the closing of the Kinross transaction, all amounts outstanding on the Company’s senior secured term and revolving credit facilities were repaid as of March 31, 2009. The facilities have underlying interest rates, which at the option of the Company are either LIBOR plus a spread of 1.25% to 2.375%, or US Base Rate plus a spread of 0.25% to 1.375% . The Company is required to comply with certain financial and non-financial covenants. These covenants include consolidated tangible net worth at the Harry Winston Diamond Corporation level, and debt to free cash flow, current assets to current liabilities, mine life protection ratio, historical debt service coverage ratio and annual loan life coverage ratio at the Harry Winston Diamond Mines Ltd. level. Under the facilities, the Company is required to establish a debt reserve account of $25.0 million and an amount equal to the billing delivered by DDMI reflecting estimated operating expenses, maintenance capital expenditures and other capital expenditures of the Diavik Diamond Mine for 30 days following each reporting period. The effective interest rate at January 31, 2009 was 2.45% .

Scheduled amortization of the Company’s senior secured term facilities of $12.5 million payable quarterly commenced March 2008 with the remaining balance paid out with the closing of the Kinross transaction on March 31, 2009. The maximum amount permitted to be drawn under the senior secured revolving facility was reduced by $12.5 million quarterly, commencing March 2009. As at January 31, 2009, the Company had $24.1 million of senior secured term facilities and had $50.0 million drawn under its senior secured revolving facility. Interest and financing charges include interest incurred on long-term debt, as well as amortization of deferred financing charges.

(b)

HARRY WINSTON INC. CREDIT FACILITIES

(i)	On February 22, 2008, Harry Winston Inc. refinanced its secured credit agreement by entering into a new secured five-year agreement with a consortium of banks, establishing a $250.0 million facility for revolving credit loans. The new facility expires on March 31, 2013. In addition, Harry Winston Inc. may increase the credit facility by an additional $50.0 million to $300.0 million during the term of the facility. There are no scheduled repayments required before maturity. The new credit facility is supported by a $20.0 million limited guarantee provided by Harry Winston Diamond Corporation. The amount available under this facility is subject to a borrowing base formula based on certain assets of Harry Winston Inc. At January 31, 2009, $179.6 million had been drawn against this facility.
	The new credit agreement contains affirmative and negative non-financial and financial covenants, which apply to the retail segment. These provisions include consolidated minimum tangible net worth, minimum coverage of fixed charges, leverage ratio and limitations on capital expenditures and certain investments. The credit agreement also includes a change of control provision, which would result in the entire unpaid principal and all accrued interest of the facility becoming due immediately upon change of control, as defined. Any material adverse change, as defined, in the retail segment’s business, assets, liabilities, consolidated financial position or consolidated results of operations constitutes default under the agreement.
	The retail segment has pledged 100% of Harry Winston Inc.’s common stock and 66 2/3% of the common stock of its foreign subsidiaries to the bank to secure the loan. Inventory and accounts receivable of Harry Winston Inc. are pledged as collateral to secure the borrowings of Harry Winston Inc. In addition, an assignment of proceeds on insurance covering security collateral was made.

40 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Loans under the credit facility can be either fixed rate loans or revolving line of credit loans. The fixed rate loans will bear interest within a range of 1.50% to 2.25% above LIBOR based upon a pricing grid determined by the fixed charge coverage ratio. Interest under this option will be determined for periods of either one, two, three or six months. The revolving line of credit loans will bear interest within a range of 0.50% to 0.75% above the bank’s prime rate based upon a pricing grid determined by the fixed charge coverage ratio as well.
(ii)	Harry Winston S.A. maintains a 25-year loan agreement for $15.0 million (17.5 million CHF) used to finance the construction of the new watch factory in Geneva, Switzerland. At January 31, 2009, $14.7 million had been drawn against the facility compared to $16.1 million at January 31, 2008. The bank has a secured interest in the factory building. On June 26, 2008, the bank further extended a demand credit facility for 2.0 million CHF. The new facility is supported by a $2.0 million standby letter of credit. At January 31, 2009, $0.5 million was drawn against this demand credit facility. The loan agreement bears interest at 3.55% and matures on January 31, 2033. Quarterly payments on the loan began on June 30, 2008.
(iii)	Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks each amounting to $8.4 million (¥750 million). At January 31, 2009, $16.8 million had been drawn against these facilities, $5.5 million of which is long term, with the balance of $11.3 million classified as bank advances. The short-term portions of the credit facilities bear interest at 1.98% and expire on April 30, 2009, and June 1, 2009, respectively. The long-term portion bears interest at 2.38% and expires on June 28, 2010.

(c)

Required Principal Repayments

2010	$	75,097
2011		9,613
2012		1,073
2013		1,119
2014		180,778
Thereafter		13,042
	$	280,722

(ii)

Bank Advances

The Company operates two other revolving financing facilities. The Company has available $45.0 million (utilization in either US dollars or Euros) and $10.0 million for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., its Israeli subsidiary, Harry Winston Diamond (Israel) Limited, and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. Borrowings under the Belgium facility bear interest at the bank’s base rate plus 1.5% and borrowings under the Israeli facility bear interest at LIBOR plus 1%. At January 31, 2009, $18.4 million, $4.7 million and $1.5 million were drawn under the Company’s revolving financing facilities relating to its Belgian subsidiary, Harry Winston Diamond International N.V., its Israeli subsidiary, Harry Winston Diamond (Israel) Limited and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. Harry Winston Diamond (Israel) Limited has scheduled repayments of $1.0 million per month on the outstanding balance commencing February 2009. The Belgium facility has an annual commitment fee of 0.75% per annum. Both facilities are guaranteed by Harry Winston Diamond Corporation.

Harry Winston Japan, K.K. maintains unsecured credit agreements with two banks each amounting to $8.4 million (¥750 million). At January 31, 2009, $16.8 million had been drawn against these facilities, $5.5 million of which is long term, with the balance of $11.3 million classified as bank advances. The short-term portions of the credit facilities bear interest at 1.98% and expire on April 30, 2009, and June 1, 2009, respectively. The long-term portion bears interest at 2.38% and expires on June 28, 2010. Harry Winston Inc. has also entered into a credit agreement to provide a credit facility to Harry Winston Japan, K.K. secured solely by the inventory of Harry Winston Japan, K.K. in an amount of $6.4 million (¥575 million). This facility bears interest at 2.30% and expires on June 19, 2009.

 

2009 ANNUAL REPORT 41

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 11:  INCOME TAX

The future income tax asset of the Company is $43.3 million, of which $29.3 million relates to the retail segment. Included in the future tax asset is $22.5 million that has been recorded to recognize the benefit of $69.6 million of net operating losses that Harry Winston Inc. and its subsidiaries have available for carryforward to shelter income taxes for future years. The net operating losses are scheduled to expire between 2014 and 2028.

The future income tax liability of the Company is $303.3 million of which $82.7 million relates to the retail segment. Harry Winston Inc.’s future income tax liabilities include $56.7 million from the purchase price allocation. The Company’s future income tax asset and liability accounts are revalued to take into consideration the change in the Canadian dollar compared to the US dollar and the unrealized foreign exchange gain or loss is recorded in net earnings for each year.

(a)

The income tax provision consists of the following:

		2009			2008
Current expense	$	81,787		$	47,516
Future expense		(21,531	)		8,578
	$	60,256		$	56,094

(b)

The tax effects of temporary differences that give rise to significant portions of the future tax assets and liabilities at January 31, 2009 and 2008 are as follows:

		2009			2008
FUTURE INCOME TAX ASSETS:
Net operating loss carryforwards	$	27,199		$	23,458
Capital assets		1,267			1,158
Future site restoration costs		12,691			13,135
Retail inventory		2,635			1,426
Other future income tax assets		4,959			4,983
Gross future income tax assets		48,751			44,160
Valuation allowance		(5,413	)		(3,197	)
Future income tax assets		43,338			40,963
FUTURE INCOME TAX LIABILITIES:
Deferred mineral property costs		(38,813	)		(56,776	)
Capital assets		(151,579	)		(160,319	)
Retail inventory		(25,735	)		(13,781	)
Goodwill		(56,748	)		(57,718	)
Unrealized foreign exchange gains		(580	)		(3,194	)
Other future income tax liabilities		(29,829	)		(78,712	)
Future income tax liabilities		(303,284	)		(370,500	)
Future income tax liability, net	$	(259,946	)	$	(329,537	)

(c)

The difference between the amount of the reported consolidated income tax provision and the amount computed by multiplying the earnings (loss) before income taxes by the statutory tax rate of 31% (2008 – 34%) is a result of the following:

		2009			2008
Expected income tax expense	$	40,424		$	55,308
Non-deductible (non-taxable) items		(20,884	)		9,773
Northwest Territories mining royalty (net of income tax relief)		15,686			18,856
Impact of changes in future corporate income tax rates		–			(11,697	)
Earnings subject to tax different than statutory rate		(6,032	)		(5,293	)
Benefit on losses recognized through reduction of goodwill		–			4,362
Impact of impairment charge on goodwill		29,034			–
Assessments and adjustments		(64	)		(11,649	)
Change in valuation allowance		2,603			(2,477	)
Other		(511	)		(1,089	)
Recorded income tax expense	$	60,256		$	56,094

(d)

The Company has net operating loss carryforwards for Canadian income tax purposes of approximately $1.1 million. Harry Winston Inc. has net operating loss carryforwards for US income tax purposes of $54.9 million and $14.7 million for other foreign jurisdiction tax purposes.

 

42 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12:  FUTURE SITE RESTORATION COSTS

		2009		2008
At February 1, 2008 and 2007	$	32,980	$	17,200
Revision of previous estimates		4,880		14,897
Accretion of provision		1,646		883
At January 31, 2009 and 2008	$	39,506	$	32,980

The Joint Venture has an obligation under various agreements (note 15) to reclaim and restore the lands disturbed by its mining operations.

The Company’s share of the total undiscounted amount of the future cash flows that will be required to settle the obligation incurred at January 31, 2009 is estimated to be $49.9 million of which approximately $32.4 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2008 reflects anticipated higher costs for fuel, labour and equipment based on a significant escalation in these key operating costs in recent years. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at a credit adjusted risk-free interest rate of 4.96% .

NOTE 13:  SHARE CAPITAL

(a)

Authorized

Unlimited common shares without par value.

(b)

Issued

	Number of shares		Amount
Balance, January 31, 2007	58,360,755	$	305,165
SHARES ISSUED FOR:
Exercise of options	11,336		337
Balance, January 31, 2008	58,372,091	$	305,502
SHARES ISSUED FOR:
Cash	3,000,001		76,039
Balance, January 31, 2009	61,372,092	$	381,541

 (c)

Stock Options

The Corporation currently has in place a stock option plan, which was approved by the shareholders of the Corporation on July 27, 2000, amended by the shareholders on June 28, 2001 and amended by the directors on March 28, 2002 (the “Stock Option Plan”). On March 31, 2008, the Board of Directors approved amendments to the Stock Option Plan which were approved by the shareholders on June 4, 2008:

a)	an increase in the size of the Stock Option Plan, such that a maximum of 6,000,000 Common Shares may be issued pursuant to the Stock Option Plan after March 31, 2008;
b)	the introduction of a “cashless” settlement alternative in connection with the exercise of options under the Stock Option Plan;
c)	the addition of a provision whereby, if the expiry date of an option granted under the Stock Option Plan would otherwise occur during or within ten days following a Black-Out Period, the expiry date of such option shall be extended to the first business day which is at least ten days after the end of the Black-Out Period.

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

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

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

2009 ANNUAL REPORT 43

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Compensation expense for stock options was $0.5 million for fiscal 2009 (2008 – $0.2 million) and is presented as a component of both cost of sales and selling, general and administrative expenses. The amount credited to share capital for the exercise of the options is the sum of (a) the cash proceeds received and (b) the amount debited to contributed surplus upon exercise of stock options by optionees (2009 – $nil; 2008 – $0.1 million).

Changes in share options outstanding are as follows:

						2009						2008
	Options					Weighted average exercise price	Options					Weighted average exercise price
	000s			CDN$		US$	000s			CDN$		US$
Outstanding, beginning of year	1,719		$	23.52	$	22.19	1,631		$	23.43	$	20.63
Granted	–			–		–	100			25.52		24.08
Exercised	–			–		–	(11	)		27.01		25.48
Expired	(115	)		38.49		31.38	(1	)		26.45		24.95
	1,604		$	22.45	$	18.30	1,719		$	23.52	$	22.19

The following summarizes information about stock options outstanding at January 31, 2009:

	Options outstanding				Options exercisable
		Weighted
		average		Weighted			Weighted
	Number	remaining		average	Number		average
Range of exercise prices	outstanding	contractual		exercise price	exercisable		exercise price
CDN$	000s	life in years		CDN$	000s		CDN$
$9.10–$9.15	268	0.8	$	9.15	268	$	9.15
10.60–12.45	302	1.9		12.36	302		12.36
17.50–17.50	39	2.8		17.50	39		17.50
23.35–29.25	750	4.3		25.30	675		25.27
36.38–40.00	10	6.7		36.38	8		36.38
41.45–41.95	235	5.4		41.66	235		41.66
	1,604		$	22.45	1,527	$	22.28

(d)

Stock-Based Compensation

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

The fair value of options granted during the year ended January 31, 2008 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions. The Company did not grant any options during fiscal 2009.

	2009		2008
Risk-free interest rate	–		3.45%
Dividend yield	–		0.00%
Volatility factor	–		39.18%
Expected life of the options	–		3.6 years
Average fair value per option, CDN	–	$	8.53
Average fair value per option, US	–	$	8.50

44 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

(e)

RSU and DSU Plans

RSU	Number of units
Balance, January 31, 2007	174,390
AWARDS AND PAYOUTS DURING THE YEAR (NET):
RSU awards	21,873
RSU payouts	(52,548)
Balance, January 31, 2008	143,715
AWARDS AND PAYOUTS DURING THE YEAR (NET):
RSU awards	(2,500)
RSU payouts	(32,616)
Balance, January 31, 2009	108,599

DSU	Number of units
Balance, January 31, 2007	59,149
AWARDS AND PAYOUTS DURING THE YEAR (NET):
DSU awards	21,626
DSU payouts	(8,577)
Balance, January 31, 2008	72,198
AWARDS AND PAYOUTS DURING THE YEAR (NET):
DSU awards	56,790
DSU payouts	–
Balance, January 31, 2009	128,988

During the fiscal year, the Company granted (2,500) RSUs (net of forfeitures) and 56,790 DSUs under an employee and director incentive compensation program, respectively. The RSU and DSU Plans are full value phantom shares that mirror the value of Harry Winston Diamond Corporation’s publicly traded common shares.

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

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

The expenses related to the RSUs and DSUs are accrued based on the price of Harry Winston Diamond Corporation’s common shares at the end of the period and on the probability of vesting. This expense is recognized on a straight-line basis over the term of the grant. The Company recognized a recovery of $1.9 million (2008 – recovery of $0.1 million) for the twelve months ended January 31, 2009.

NOTE 14:  EARNINGS PER SHARE

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

		2009		2008
NUMERATOR:
Net earnings for the year	$	70,121	$	106,408
DENOMINATOR (THOUSANDS OF SHARES):
Weighted average number of shares outstanding		61,014		58,369
Dilutive effect of employee stock options		193		530
		61,207		58,899

2009 ANNUAL REPORT 45

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 15:  COMMITMENTS AND GUARANTEES

(a)

Environmental Agreement

Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. Harry Winston Diamond Corporation’s share of this funding requirement was $0.2 million for calendar 2009. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. Harry Winston Diamond Corporation’s share of the Joint Venture’s letters of credit outstanding with respect to the environmental agreements as at January 31, 2009 was $61.4 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities.

(b)

Participation Agreements

The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed for successive periods of six years thereafter until termination. The agreements terminate in the event the mine permanently ceases to operate.

(c)

Commitments

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

2010	$	82,787
2011		81,507
2012		78,044
2013		76,620
2014		75,612
Thereafter		122,563

NOTE 16:  EMPLOYEE BENEFIT PLANS

		Year ended		Year ended
Expense for the year		January 31, 2009		January 31,2008
Defined benefit pension plan – Harry Winston retail segment (a)	$	1,527	$	1,213
Defined contribution plan – Harry Winston retail segment (b)		866		1,063
Defined contribution plan – Harry Winston mining segment (b)		223		–
Defined contribution plan – Diavik Diamond Mine (b)		916		833
	$	3,532	$	3,109

(a)

Defined Benefit Pension Plan

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

46 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

(i)

INFORMATION ABOUT HARRY WINSTON INC.’S US DEFINED BENEFIT PLAN IS AS FOLLOWS:

		2009			2008
ACCRUED BENEFIT OBLIGATION:
Balance, beginning of year	$	11,296		$	11,784
Interest cost		656			627
Actuarial gain		(3,171	)		(373	)
Effects of changes in assumptions		–			–
Benefits paid		(738	)		(742	)
Balance, end of year		8,043			11,296
PLAN ASSETS:
Fair value, beginning of year		10,384			10,574
Actual return on plan assets		(2,426	)		397
Employer contributions		–			155
Benefits paid		(738	)		(742	)
Fair value, end of year		7,220			10,384
Funded status – plan deficit (included in accrued liabilities)	$	(823	)	$	(912	)

US plan assets represented approximately 61% of total Harry Winston retail segment plan assets at January 31, 2009. The unfunded status of the retail segment plans are comprised of $0.8 million attributed to the US-based Harry Winston Inc. plan, as reported in the table above, and $1.4 million attributed to the Harry Winston Japan, K.K. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $1.4 million. The Harry Winston S.A. plan was fully funded at January 31, 2009 with a benefit obligation of $4.3 million offset by plan assets of $4.5 million.

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

		2009			2008
Service cost	$	(1,408	)	$	(1,357	)
Interest cost		(863	)		(808	)
Expected return on plan assets		923			952
Net actuarial loss		–			–
Total	$	(1,348	)	$	(1,213	)

(ii)

PLAN ASSETS

The asset allocation of Harry Winston Inc.’s US pension benefits at January 31, 2009 were as follows:

	2009	2008
ASSET CATEGORY:
Cash equivalents	10%	2%
Equity securities	54%	72%
Fixed income securities	36%	24%
Other	0%	2%
Total	100%	100%

(iii)

THE SIGNIFICANT ASSUMPTIONS USED FOR HARRY WINSTON INC.’S US PLAN ARE AS FOLLOWS:

	2009	2008
ACCRUED BENEFIT OBLIGATION:
Discount rate	6.53%	6.24%
Expected long-term rate of return	7.50%	7.50%
BENEFIT COSTS FOR THE YEAR:
Discount rate	6.24%	5.75%
Expected long-term rate of return on plan assets	7.50%	7.50%
Rate of compensation increase	0.00%	0.00%

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

 

2009 ANNUAL REPORT 47

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

The weighted average assumptions used to determine the benefit obligations for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2009 are a discount rate and expected long-term rate of return of 1.70% and 0.00% and 2.50% and 3.25%, respectively.

The weighted average assumptions used to determine the benefit costs for Harry Winston Japan, K.K. and Harry Winston S.A. at January 31, 2009 are a discount rate, expected long-term rate of return and a rate of compensation increase of 1.70%, 0.00% and 4.42%, and 3.00%, 3.25% and 3.00%, respectively.

(iv)

 Harry Winston retail segment expects to contribute to $0.9 million to its pension plan in calender 2009

Benefits of approximately $1.4 million are expected to be paid by the retail segment in each calendar year from 2010 to 2014.  The aggregate benefits expected to be paid in the five calendar years from 2015 to 2019 are $6.9 million. The expected benefits are based on the same assumptions used to measure the retail segment’s benefit obligation at January 31, 2009.

(b)

Defined Contribution Plan

Harry Winston Inc. has a defined contribution 401(k) plan covering substantially all employees in the United States. For the fiscal years ended January 31, 2009 and 2008, Harry Winston Inc. elected to increase the employer-matching contribution to 100% of the first 6% of the employee’s salary from 50% in fiscal 2007 and prior. Employees must meet minimum service requirements and be employed on December 31 of each year in order to receive this matching contribution.

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

Harry Winston Diamond Corporation introduced a defined contribution plan in fiscal 2009 whereby the employer contributes to a maximum of 6% of the employee’s salary to the maximum contribution limit under Canada’s Income Tax Act.

(c)

Deferred Compensation Plan

On January 28, 2005, the Board of Directors of Harry Winston Inc. approved an Equity Participation Plan (the “Plan”) for certain executives of Harry Winston Inc. The Plan involves “Phantom Stock” awards, as defined in the executives’ employment agreements, which are payable in cash. These awards are split into a 40% time-vested award and a 60% cliff-vested award. The value of the award for each executive is calculated as a percentage of return on investment, as defined in the agreements as the excess of the fair value of Harry Winston Inc. at the date of calculation, over the fair value of Harry Winston Inc. at April 2, 2004, adjusted for certain items as defined in the agreements. The 40% time-vested award vests on the six annual anniversaries of each executive’s designated start date and over the six-year period, the vesting percentages are 0%, 0%, 10%, 10%, 10% and 10%, respectively. The 60% cliff-vested award vests in full on the date that Harry Winston Diamond Corporation becomes the acquirer of 100% of the common stock of Harry Winston Inc. The executives must remain employed by Harry Winston Inc. through the vesting dates in order for the awards to vest. Both awards would vest immediately upon the date of any future change in control as defined in the employment agreements. On September 29, 2006, Harry Winston Diamond Corporation acquired 100% of the common stock of Harry Winston Inc. As a result, the cliff-vested award has vested. At January 31, 2009 and 2008, Harry Winston Inc. has recorded a liability of $3.1 million and $6.3 million, respectively, relating to the Plan.

At January 31, 2009 and 2008, Harry Winston Inc. has recorded a liability of $6.0 million and $5.8 million, respectively, in connection with a deferred compensation plan for a key executive. According to the terms of this plan, the executive is entitled to deferred compensation of $5.0 million, which vests in equal installments on the first through the third anniversaries of the executive’s first day of employment with Harry Winston Inc. On each vesting date, the vested portion of the deferred compensation will be paid to the executive unless the executive provides Harry Winston Inc. with prior written notice to defer receipt of all or a portion of the vested portion of the deferred compensation. All such vested amounts deferred at the request of the executive will be distributed to the executive upon the executive’s termination of employment with Harry Winston Inc. The deferred compensation bears interest at LIBOR.

48 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 17:  CAPITAL MANAGEMENT

The Company's capital includes cash and cash equivalents, short-term debt, long-term debt 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’s mining and retail segments maintain separate financing arrangements. Accordingly, the Company assesses liquidity and capital resources on a segmented basis. The retail segment’s cash requirements are for cash operating expenses, working capital and capital expenditures, including salon expansion. The Company believes that cash on hand, cash generated from operations and access to credit facilities will be sufficient to meet anticipated cash requirements for the retail segment next fiscal year.

The mining segment’s cash requirements are for cash operating expenses, working capital and capital expenditures. With the closing of the Kinross transaction, the Company believes that cash on hand and cash generated from the sale of rough diamonds will be sufficient to meet anticipated cash requirements for the next fiscal year.

The Company is subject to externally imposed capital requirements related to its senior secured term and revolving credit facilities, whereby it is required to maintain a consolidated tangible net worth in excess of $250 million. There has been no change with respect to the Company’s overall capital risk management strategy. At January 31, 2009, the Company is in compliance with this covenant.

NOTE 18:  FINANCIAL INSTRUMENTS

The Company has various financial instruments comprised of cash and cash equivalents, cash collateral and cash reserves, accounts receivable, accounts payable and accrued liabilities, bank advances and long-term debt.

Cash and cash equivalents consist of cash on hand and balances with banks and short-term investments held in overnight deposits with a maturity on acquisition of less than 90 days. Cash and cash equivalents are designated as held-for-trading and are carried at fair value.

The fair value of accounts receivable is determined by the amount of cash anticipated to be received in the normal course of business from the financial asset.

The Company’s long-term debt is fully secured; hence the fair value of this instrument at January 31, 2009 is considered to approximate its carrying value.

The carrying values of these financial instruments are as follows:

				January 31, 2009				January 31, 2008
		Estimated		Carrying		Estimated		Carrying
		Fair Value		Value		Fair Value		Value
FINANCIAL ASSETS:
Cash and cash equivalents	$	16,735	$	16,735	$	49,628	$	49,628
Cash collateral and cash reserves		30,145		30,145		25,615		25,615
Accounts receivable		66,980		66,980		25,505		25,505
	$	113,860	$	113,860	$	100,748	$	100,748
FINANCIAL LIABILITIES:
Accounts payable and accrued liabilities	$	118,390	$	118,390	$	124,426	$	124,426
Bank advances		42,621		42,621		34,928		34,928
Long-term debt		280,722		280,722		309,349		309,349
	$	441,733	$	441,733	$	468,703	$	468,703

2009 ANNUAL REPORT 49

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 19:  FINANCIAL RISK EXPOSURE AND RISK MANAGEMENT

The Company is exposed, in varying degrees, to a variety of financial instrument related risks by virtue of its activities. The Company’s overall financial risk management program focuses on the preservation of capital and protecting current and future Company assets and cash flows by minimizing exposure to risks posed by the uncertainties and volatilities of financial markets.

The Company’s Audit Committee has responsibility to review and discuss significant financial risks or exposures and to assess the steps management has taken to monitor, control, report and mitigate such risks to the Company.

Financial risk management is carried out by the Finance department, which identifies and evaluates financial risks and establishes controls and procedures to ensure financial risks are mitigated.

The types of risk exposure and the way in which such exposures are managed are as follows:

i)

Currency Risk

The Company’s sales are predominately denominated in US dollars. As the Company operates in an international environment, some of the Company's financial instruments and transactions are denominated in currencies other than the US dollar. The results of the Company's operations are subject to currency transaction risk and currency translation risk. The operating results and financial position of the Company are reported in US dollars in the Company's consolidated financial statements.

The Company’s primary foreign exchange exposure impacting pre-tax earnings arises from the following sources:

• Net Canadian dollar denominated monetary assets and liabilities. The most significant exposure relates to its Canadian dollar future income tax liability. 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/strengthening of the Canadian dollar versus the US dollar results in an unrealized foreign exchange gain/loss on the revaluation of the Canadian dollar denominated future income tax liability.

• Committed or anticipated foreign currency denominated transactions, primarily Canadian dollar costs at the Diavik Diamond Mine.

Based on the Company's net exposure to Canadian dollar monetary assets and liabilities at January 31, 2009, a one-cent change in the exchange rate would have impacted pre-tax net earnings for the year by $2.5 million.

ii)

Interest Rate Risk

Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of fluctuations in interest rates. Financial assets and financial liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company’s most significant interest rate risk arises from its various credit facilities which bear variable interest based on LIBOR. Based on the Company's LIBOR based credit facilities at January 31, 2009, a 100 basis point change in the LIBOR rate would have impacted pre-tax net earnings for the year by $1.9 million.

iii)

Concentration of Credit Risk

Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligation.

Financial instruments that potentially subject the Company to credit risk consist of trade receivables from retail segment clients. While economic factors can affect credit risk, the Company manages risk by providing credit terms on a case-by-case basis only after a review of the client’s financial position and past credit history. The Company has not experienced significant losses in the past from its customers.

The Company's exposure to credit risk in the mining segment is minimized by its sales policy, which requires receipt of cash prior to the delivery of rough diamonds to its customers.

50 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

The Company manages credit risk, in respect of short-term investments, by maintaining bank accounts with Tier 1 banks and investing only in term deposits or banker's acceptances with highly rated financial institutions that are capable of prompt liquidation. The Company monitors and manages its concentration of counterparty credit risk on an ongoing basis.

At January 31, 2009, the Company’s maximum counterparty credit exposure consists of the carrying amount of cash and cash equivalents and accounts receivable, which approximates fair value.

iv)

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.

The Company manages its liquidity by ensuring that there is sufficient capital to meet short and long-term business requirements, after taking into account cash flows from operations and the Company's holdings of cash and cash equivalents. The Company also strives to maintain sufficient financial liquidity at all times in order to participate in investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances. Management forecasts cash flows for its current and subsequent fiscal years to predict future financing requirements. Future requirements are met through a combination of committed credit facilities and access to capital markets.

At January 31, 2009, the Company had $16.7 million of cash and cash equivalents and $70.4 million available under credit facilities.

The following table summarizes the aggregate amount of contractual future cash outflows for the Company’s financial liabilities:

				Less than		Year		Year		After
(expressed in thousands of United States dollars)		Total		1 year		2–3		4–5		5 years
Accounts payable and accrued liabilities	$	118,390	$	118,390	$	–	$	–	$	–
Income taxes payable		76,987		76,987		–		–		–
Bank advances		42,621		42,621		–		–		–
Long-term debt (a)		320,118		84,408		26,799		192,135		16,776
Environmental and participation agreements incremental commitments		77,345		64,243		2,609		1,011		9,482
Operating lease obligations		106,064		17,701		26,280		16,865		45,218
Capital lease obligations		1,389		844		545		–		–
(a) Includes projected interest payments on the current debt outstanding based on interest rates in effect at January 31, 2009.

NOTE 20:  INSURANCE SETTLEMENTS

In December 2008, approximately $31.7 million in Company-owned and consigned retail inventory at cost was stolen during a second robbery at the Harry Winston Paris salon. The Company was fully insured against the loss, and recognized a pre-tax gain of $16.7 million in the fourth quarter on settlement of the insurance claim compared to a pre-tax gain of $13.5 million on the first Paris salon robbery that occurred in the third quarter of the prior year. Included in accounts receivable at January 31, 2009 is a $48.4 million receivable relating to the insurance settlement that was received in February 2009. The remaining balance of the insurance claim is $3.3 million, of which $1.0 million was received in February 2009; the insurance company has agreed to pay the balance of $2.3 million which is expected to be received during April 2009. Also included in insurance settlement is a $0.5 million gain resulting from an excavator fire that occurred in the fourth quarter of fiscal 2006 at the Diavik Diamond Mine.

NOTE 21:  SEGMENTED INFORMATION

The Company operates in two segments within the diamond industry, mining and retail, as of January 31, 2009.

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

 

2009 ANNUAL REPORT 51

HARRY WINSTON DIAMOND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

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

For the twelve months ended January 31, 2009		Mining			Retail			Total
Revenue
Canada	$	328,223		$	–		$	328,223
United States		–			93,978			93,978
Europe		–			117,588			117,588
Asia		–			69,431			69,431
Cost of sales		139,769			147,509			287,278
Gross margin		188,454			133,488			321,942
Gross margin (%)		57.4%			47.5%			52.8%
Selling, general and administrative expenses		19,903			135,973			155,876
Earnings (loss) from operations		168,551			(2,485	)		166,066
Interest and financing expenses		(9,183	)		(11,274	)		(20,457	)
Other income		2,595			(349	)		2,246
Insurance settlement		558			16,682			17,240
Impairment charge		–			(93,780	)		(93,780	)
Foreign exchange gain (loss)		60,879			(1,792	)		59,087
Segmented earnings (loss) before income taxes	$	223,400		$	(92,998	)	$	130,402
Segmented assets as at January 31, 2009
Canada	$	980,500		$	–		$	980,500
United States		–			404,952			404,952
Other foreign countries		27,243			153,880			181,123
	$	1,007,743		$	558,832		$	1,566,575
Capital expenditures	$	200,289		$	9,574		$	209,863
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax recovery	$	(17,789	)	$	(3,742	)	$	(21,531	)
Amortization and accretion	$	64,374		$	12,596		$	76,970

For the twelve months ended January 31, 2008		Mining			Retail			Total
Revenue
Canada	$	413,772		$	–		$	413,772
United States		–			112,453			112,453
Europe		–			81,429			81,429
Asia		–			71,653			71,653
Cost of sales		169,680			141,507			311,187
Gross margin		244,092			124,028			368,120
Gross margin (%)		59.0%			46.7%			54.2%
Selling, general and administrative expenses		23,359			127,086			150,445
Earnings (loss) from operations		220,733			(3,058	)		217,675
Interest and financing expenses		(14,940	)		(12,918	)		(27,858	)
Other income		2,326			432			2,758
Insurance settlement		–			13,488			13,488
Foreign exchange gain (loss)		(45,042	)		1,651			(43,391	)
Segmented earnings (loss) before income taxes	$	163,077		$	(405	)	$	162,672
Segmented assets as at January 31, 2008
Canada	$	856,841		$	–		$	856,841
United States		–			459,525			459,525
Other foreign countries		22,466			155,116			177,582
	$	879,307		$	614,641		$	1,493,948
Goodwill as at January 31, 2008	$	–		$	93,780		$	93,780
Capital expenditures	$	170,711		$	38,656		$	209,367
OTHER SIGNIFICANT NON-CASH ITEMS:
Income tax expense (recovery)	$	13,874		$	(5,296	)	$	8,578
Amortization and accretion	$	71,840		$	9,334		$	81,174

Sales to one customer in the mining segment totalled $20.8 million (2008 – $28.4 million) for the twelve months ended January 31, 2009.

52 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION
 

Diavik Diamond Mine Mineral Reserve
and Mineral Resource Statement

As of December 31, 2008

PROVEN AND PROBABLE RESERVES

			Proven			Probable		Proven and Probable
	Millions	Carats	Millions	Millions	Carats	Millions	Millions	Carats	Millions
Open pit and	of	per	of	of	per	of	of	per	of
underground mining	tonnes	tonne	carats	tonnes	tonne	carats	tonnes	tonne	carats
A-154 South
Open Pit	–	–	–	0.7	6.1	4.3	0.7	6.1	4.3
Underground	–	–	–	2.9	4.8	13.8	2.9	4.8	13.8
Total A-154 South	–	–	–	3.6	5.0	18.2	3.6	5.0	18.2
A-154 North
Open Pit	–	–	–	–	–	–	–	–	–
Underground	2.9	2.2	6.3	5.7	2.1	12.2	8.6	2.1	18.4
Total A-154 North	2.9	2.2	6.3	5.7	2.1	12.2	8.6	2.1	18.4
A-418
Open Pit	3.6	3.0	10.7	–	–	–	3.6	3.0	10.7
Underground	0.5	3.9	1.9	3.8	3.7	13.9	4.3	3.7	15.9
Total A-418	4.1	3.1	12.7	3.8	3.7	13.9	7.9	3.4	26.6
Total
Open Pit	3.6	3.0	10.7	0.7	6.1	4.3	4.3	3.5	15.1
Underground	3.4	2.4	8.2	12.4	3.2	39.9	15.8	3.0	48.1
Total Reserves	7.0	2.7	18.9	13.1	3.4	44.3	20.1	3.1	63.2
Note: Totals may not add up due to rounding.

ADDITIONAL INDICATED AND INFERRED RESOURCES

		Measured Resources			Indicated Resources			Inferred Resources
	Millions	Carats	Millions	Millions	Carats	Millions	Millions	Carats	Millions
	of	per	of	of	per	of	of	per	of
Kimberlite pipe	tonnes	tonne	carats	tonnes	tonne	carats	tonnes	tonne	carats
A-154 South	–	–	–	–	–	–	0.6	5.0	2.9
A-154 North	–	–	–	–	–	–	2.0	2.5	5.0
A-418	–	–	–	–	–	–	0.6	4.0	2.5
A-21	–	–	–	4.1	3.1	12.7	0.7	2.8	1.9
Total	–	–	–	4.1	3.1	12.7	3.9	3.2	12.4
Note: Totals may not add up due to rounding.

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

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

　

2009 ANNUAL REPORT 53

HARRY WINSTON DIAMOND CORPORATION
 

Harry Winston Retail Salons

United States	Europe	Japan
Bal Harbour	Geneva	Nagoya
Bal Harbour Shops	8 Rue de Tourbillion	1-1-6 Higashisakura
9700 Collins Avenue, Suite 151	1218 Plan Les Quates, Switzerland	Higashi-Ku
Bal Harbour, Florida 33154	Tel: 41.22.712.2900	Nagoya, Japan 461-0005
Tel: 786.206.6657		Tel: 81.5.2950.5100
	London
Beverly Hills	171 New Bond Street	Osaka
310 North Rodeo Drive	London, England WIS-4RD	Shinsaibashi District
Beverly Hills, California 90210	Tel: 44.207.907.8800	3-10-25, Minamisemba
Tel: 310.271.8554		Chuo-Ku
	Paris	Osaka, Japan 542-0081
Chicago	29 Avenue Montaigne	Tel: 81.6.6281.8855
55 East Oak Street	75008 Paris, France
Chicago, Illinois 60611	Tel: 33.1.4720.0309	Tokyo – Ginza
Tel: 312.705.1820		1-8-14 Ginza, Chuo-Ku
	Asia	Tokyo, Japan 104-0061
Costa Mesa	Beijing	Tel: 81.3.3535.6441
3333 Bristol Street, Suite 2660	Peninsula Beijing Palace Hotel
Costa Mesa, California 92626	8 Goldfish Lane, Wangfujing	Tokyo – Midtown
Tel: 714.371.1910	Beijing, 100006	Roppongi District
	The People’s Republic of China	9-7-3, Akasaka, Minato-Ku
Dallas	Tel: 861.0.8511.5595	Tokyo, Japan 107-0052
19 Highland Park Village		Tel: 81.3.5413.3400
Dallas, Texas 75205	Hong Kong
Tel: 214.647.5830	The Peninsula Hotel	Tokyo – Omotesando
	Shop E8, G/F	Omotesando Hills
Honolulu	Salisbury Road	4-12-10, Jingumae Shibuya-ku
Ala Moana Center	Tsimshatsui, Kowloon	Tokyo, Japan 150-0001
1450 Ala Moana Blvd, Suite 2094	Hong Kong	Tel: 81.3.5785.0440
Honolulu, Hawaii 96814	Tel: 852.2301.2131
Tel: 808.791.4000
	Taipei
Las Vegas	Regent Hotel
The Forum Shops at Caesars	2nd Fl., No 41, Sec 2,
3500 Las Vegas Blvd South, Suite R25	Chung Shan N Road
Las Vegas, Nevada 89109	104 Taipei, Taiwan
Tel: 702.933.7370	Tel: 886.2.2521.7808
New York 718 Fifth Avenue New York, New York 10019 Tel: 212.245.2000 Toll free number for United States: 1.800.988.4110

Harry Winston Diamond Sales Offices

Belgium Sales Office	India Sales Office
Harry Winston Diamond	Harry Winston Diamond (India)
International N.V.	Private Limited
Diamantclub Van Antwerpen Suite 760,	606 C Wing, Dharam Palace
62 Pelikaanstraat	101–103, N.S. Patkar Marg
Antwerp 2018, Belgium	Mumbai 400 007, India
Tel: +32.3.225.5315	Tel: +91.22.236.99004
Fax: +32.3.233.2165	Fax: +91.22.236.92299

54 2009 ANNUAL REPORT

HARRY WINSTON DIAMOND CORPORATION

Board of Directors and Senior Management

Board of Directors		Senior Management
Robert A. Gannicott	Laurent E. Momméja	Robert A. Gannicott
Chairman & Chief Executive Officer,	Managing Director of Hermès Maison	Chairman & Chief Executive Officer
Harry Winston Diamond Corporation	and President of La Compagnie
Director since June 1992	des Arts de la Table, a subsidiary	Thomas J. O’Neill
	of Hermès International	President, Harry Winston
Matthew W. Barrett	Director since June 2004	Diamond Corporation and
Lead Director of the Board		Chief Executive Officer,
Director since January 2008	Thomas J. O’Neill	Harry Winston Inc.
	President, Harry Winston
Thomas M. Boehlert	Diamond Corporation and	Alan S. Mayne
Executive Vice President &	Chief Executive Officer,	Chief Financial Officer
Chief Financial Officer,	Harry Winston Inc.
Kinross Gold Corporation	Director since July 2002	James R.W. Pounds
Director since April 2009		Executive Vice President
	J. Roger B. Phillimore	Buying/Sourcing
Micheline Bouchard	Chairman of Lonmin plc
Corporate Director	Director since November 1994	Raymond N. Simpson
Director since January 2008		Executive Vice President
	Corporate Secretary
Noel Harwerth	Lyle R. Hepburn	Beth Bandler
Corporate Director		Senior Vice President &
Director since June 2008		General Counsel, Legal and
		Human Resources
Daniel Jarvis
Corporate Director		Susan E. Munn
Director since June 2008		Senior Vice President,
		Security and Loss Prevention
		Wendy Kei
		Vice President &
		Corporate Controller
		Robert A. Scott
		Chief Financial Officer,
		Harry Winston Inc.

2009 ANNUAL REPORT 55

HARRY WINSTON DIAMOND CORPORATION
 

Shareholder Information

Transfer Agents & Registrars		Annual Meeting of Shareholders
Please direct inquiries concerning	Registrar and Transfer Company	The Fairmont Royal York Hotel
shares, share transfers, dividend	10 Commerce Drive	100 Front Street West
payments and change of address	Cranford, New Jersey, 07016	Toronto, Ontario, Canada
to the Transfer Agent:	Toll free 1.800.368.5948	Thursday, June 4, 2009
	Tel: 908.497.2300	10:00 AM
CIBC Mellon Trust Company	Fax: 908.497.2318
P.O. Box 7010	e-mail: info@rtco.com	Corporate Offices
Adelaide Street Postal Station	www.rtco.com	Harry Winston
Toronto, Ontario, Canada		Diamond Corporation
M5C 2W9	Audit ors	P.O. Box 4569, Station A
Toll free within Canada and	KPMG LLP	Toronto, Ontario, Canada
United States:	Chartered Accountants	M5W 4T9
1.800.387.0825	Suite 3300	Tel: 416.362.2237
Tel: 416.643.5500	Commerce Court West	Fax: 416.362.2230
Fax: 416.643.5501	Toronto, Ontario, Canada	investor.harrywinston.com
e-mail: inquiries@cibcmellon.com	M5L 1B2
www.cibcmellon.com		Harry Winston Inc.
		Corporate Office
		1330 Avenue of the Americas
Harry Winston Diamond Corporation Stock Trading History Toronto Stock Exchange: HW New York Stock Exchange: HWD		New York, New York 10019
		Tel: 212.315.7900
		Fax: 212.581.2612
		harrywinston.com

	Feb. 1, 2008 to Jan. 31, 2009		Feb. 1 ,  2007 to Jan. 31, 2008
				*NASDAQ/
	TSX CDN$	NYSE US$	TSX CDN$	NYSE US$
High	32.15	31.68	48.36	45.18
Low	3.90	2.62	21.03	21.78
Close	4.88	3.92	24.75	24.59
Average daily volume	244,327	99,515	195,154	33,848

* The Company delisted from NASDAQ on November 16, 2007, and listed on the New York Stock Exchange on November 19, 2007.

New York Stock Exchange Disclosure Differences
As a foreign private issuer, Harry Winston Diamond Corporation is required to disclose the significant ways in which its corporate governance practices differ from those followed by US domestic companies under NYSE listing standards. This disclosure can be obtained from the governance section of our website at investor.harrywinston.com

56 2009 ANNUAL REPORT