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 June, 2012 Commission File Number: 001-33838

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 [X] 

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 [X]

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 22^nd day of June, 2012.

HARRY WINSTON DIAMOND CORPORATION
(Registrant)

By: /s/ LYLE R. HEPBURN                                                 
       Name: Lyle R. Hepburn
       Title: Corporate Secretary

EXHIBIT INDEX

EXHIBIT	DESCRIPTION OF EXHIBIT
99.1	Notice of Annual and Special Meeting and Management Proxy Circular of Harry Winston Diamond Corporation dated June 6, 2012.
99.2	Proxy solicited by Management and the Board of Directors of Harry Winston Diamond Corporation.
99.3	Annual Request Form for Registered Shareholders in accordance with National Instrument 51-102 regarding Mailing List for Harry Winston Diamond Corporation.
99.4	Annual Request Form for Beneficial Shareholders in accordance with National Instrument 51-102 regarding Mailing List for Harry Winston Diamond Corporation.
99.5	2011-2012 Annual Report of Harry Winston Diamond Corporation to its Shareholders.

EX-99.1

 Exhibit 99.1

HARRY WINSTON DIAMOND CORPORATION

MANAGEMENT PROXY CIRCULAR

For the
Annual and Special Meeting of Shareholders
July 18, 2012

___________________________________

June 6, 2012

TABLE OF CONTENTS

DESCRIPTION	PAGE
INVITATION TO SHAREHOLDERS	2
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS	3
MANAGEMENT PROXY CIRCULAR	4
Q&A ON PROXY VOTING	4
REPORTING CURRENCY	6
BUSINESS OF THE MEETING	7
Financial Statements	7
Election of Directors	7
Appointment of Auditors	8
Approval of 2012 Restricted Share Unit Plan	9
BOARD OF DIRECTORS	12
Nominees for Election to the Board of Directors	12
Compensation of Directors	16
Director Summary Compensation Table	18
Incentive Plan Awards	20
Meetings Held and Attendance of Directors	21
Directors’ and Officer’s Liability Insurance	22
Retirement Policy	22
CORPORATE GOVERNANCE DISCLOSURE	22
REPORT OF THE AUDIT COMMITTEE	22
REPORT OF THE HUMAN RESOURCES & COMPENSATION COMMITTEE	23
Succession Planning	24
Say on Pay	24
REPORT OF THE NOMINATING & CORPORATE GOVERNANCE COMMITTEE	25
STATEMENT OF EXECUTIVE COMPENSATION	26
Compensation Discussion and Analysis	26
Performance Graph	38
Summary Compensation Table	39
Incentive Plan Awards	41
Pension Plan Benefits and Deferred Compensation Plan	41
Termination and Change in Control Benefits	42
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS	45
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS	46
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS	47
ADDITIONAL INFORMATION	47
BOARD APPROVAL	47
SCHEDULE 1 - STATEMENT OF CORPORATE GOVERNANCE PRACTICES	48
Board of Directors	48
Majority Voting Policy	49
Board Mandate	49
Position Descriptions	50
Orientation and Continuing Education	50
Ethical Business Conduct	50
Nomination of Directors	51
Compensation	52
Board Committees	52
Assessments	52

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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 and Special Meeting of Shareholders on Wednesday, July 18, 2012.

The items of business to be considered at this Meeting are described in the Notice of Annual and Special 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.

There will be an opportunity to ask questions and meet with management, the Board of Directors and your fellow shareholders.

We look forward to seeing you at the Meeting.

Sincerely,

Robert A. Gannicott
Chairman & Chief Executive Officer

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

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

NOTICE IS HEREBY GIVEN that an Annual and Special Meeting of Shareholders (the “Meeting”) of HARRY WINSTON DIAMOND CORPORATION (the “Corporation”) will be held at The Prince of Wales Northern Heritage Centre, 4750 48th Street, Yellowknife, Northwest Territories at 7:00 a.m. Mountain time (10:00 a.m. Toronto time) on Wednesday, July 18, 2012, for the following purposes:

1.	to receive the audited consolidated financial statements of the Corporation for the fiscal year ended January 31, 2012, together with the report of the auditors thereon;
2.	to elect directors;
3.	to appoint auditors and authorize the directors to fix their remuneration;
4.	to consider and, if thought fit, pass a resolution with or without variation, approving the Corporation’s 2012 Restricted Share Unit Plan, the reservation of up to 110,000 Common Shares of the Corporation for issuance under such plan, and the initial grant of 101,449 Restricted Share Units to Frederic de Narp pursuant to such plan, all as described in the Management Proxy Circular accompanying this notice; and
5.	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 the Proxy Department 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 within North America) or 416-368-2502, or in person at 320 Bay Street, Basement Level (B1), Toronto, Ontario, Canada, M5H 4A6, no later than 5:00 p.m. (Toronto time) on July 16, 2012, 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
June 6, 2012

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HARRY WINSTON DIAMOND CORPORATION
MANAGEMENT PROXY CIRCULAR

All information is as of June 1, 2012 and all dollar figures are in United States dollars, unless otherwise indicated.

Q&A ON PROXY VOTING

Q:	What am I voting on?
A:	At the Annual and Special Meeting of Shareholders (the “Meeting”), 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. The special business of the meeting includes the approval of a new 2012 Restricted Share Unit Plan for the President and Chief Executive Officer of Harry Winston, Inc. (“HWI”), the reservation of up to 110,000 Common Shares of the Corporation for issuance under such plan, and the initial grant of 101,449 Restricted Share Units to Frederic de Narp pursuant to such plan.
Q:	Who is entitled to vote?
A:	If you owned your shares as at the close of business on June 1, 2012, you are entitled to vote. Each Common Share is entitled to one vote on those items of business identified in the Notice of Annual and Special 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 solicited personally, by telephone, e-mail, internet, facsimile, or other means of communication by employees of the Corporation.

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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 Daniel Jarvis, each of whom is a director of the Corporation, or to another person you have appointed, to vote your shares at the Meeting.
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 accompanying 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 or toll free at 1 (866) 781-3111 (within North America), so that it arrives no later than 5:00 p.m. (Eastern Standard Time) on Monday, July 16, 2012 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 Monday, July 16, 2012 or to the Chairman on the day of the Meeting, July 18, 2012, 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 as described herein, the appointment of auditors, and the approval of the 2012 Restricted Share Unit Plan Resolution (as defined herein), the initial grant of Restricted Share Units to Mr. de Narp and the reservation of up to 110,000 Common Shares of the Corporation for issuance under such plan.
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 and Special 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.

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Q:	How many shares are entitled to vote?
A:	As of June 1, 2012 (the “Record Date”), there were outstanding 84,874,781 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 carrying 10% or more of the voting rights attached to any class of voting securities of the Corporation:

Name of Shareholder and Municipality of Residence	Number of Common Shares Owned, Controlled or Directed	% of Outstanding Common Shares
Vanguard Precious Metals and Mining Fund Malvern, PA, USA	9,500,000	11.2%

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, c/o Canadian Stock Transfer Company Inc. P.O. Box 700, Station B, Montreal, Quebec, H3B 3K3

or by telephone:	416-682-3860 or 1-800-387-0825	Fax:	1-888-249-6189
E-mail:	inquiries@canstockta.com	Website:	www.canstockta.com

REPORTING CURRENCY

The reporting currency of the Corporation is the United States dollar. Certain dollar amounts reported in the various tables in this Management Proxy Circular that were originally incurred in Canadian dollars have been converted, as applicable, into United States dollars from Canadian dollars as follows:

1. The Canadian currency exchange rate, being the rate for exchanging a Canadian dollar into a United States dollar, (the “Exchange Rate”) was obtained from the Bank of Canada closing rates for the applicable dates listed below, which rates were as follows:

(a)	the Exchange Rate for February 1, 2011 (the “Year-Beginning Exchange Rate”) was 1.0092;
(b)	the Exchange Rate for January 31 , 2012 (the “Year-End Exchange Rate”) was 0.9972;
(c)	the average Exchange Rate for the fiscal period February 1, 2011 to January 31, 2012 (the “Average Exchange Rate”) was 1.0093;

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(d)	the Exchange Rate for February 1, May 1, August 1, and November 1, 2011 (the “Quarterly Exchange Rate” was 1.0092, 1.0566, 1.0466, and 0.9815, respectively; and
(e)	the Exchange Rate for May 15, 2012 (the “May Exchange Rate”) was 0.9932.

2.	The dollar amounts shown for deferred share units (“DSUs”) granted to directors represent the Canadian dollar amount credited to their respective accounts on a quarterly basis, converted into United States dollars using the corresponding Quarterly Exchange Rate.
3.	The cash retainers paid to directors represent the Canadian dollar amount paid to them on a quarterly basis, converted into United States dollars using the corresponding Quarterly Exchange Rate.
4.	The value of restricted share units (“RSUs”) granted to Named Executive Officers was converted into United States dollars using the Exchange Rate at the date of the grant.
5.	The value of outstanding RSUs of Named Executive Officers was converted into United States dollars using the Year-End Exchange Rate.
6.	Cash compensation paid to Named Executive Officers, and in respect of consulting services referred to herein, was converted into United States dollars using the Average Exchange Rate.

BUSINESS OF THE MEETING

Financial Statements

The Consolidated Financial Statements for the year ended January 31, 2012 are included in the 2012 Annual Report.

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. On January 14, 2009, the Board adopted a majority voting policy. Board policy requires that in an uncontested election, any nominee who receives a greater number of votes ‘‘withheld’’ than “for” shall submit his or her resignation to the Nominating & Corporate Governance Committee 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 determine whether or not to accept the recommendation and announce in a press release the Board’s determination (and the reasons for rejecting the resignation, if applicable) within 90 days following the date of the Meeting. 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.

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The list of directors and their biographies can be found on pages 12 to 16 of this Management Proxy Circular (see “Nominees for Election to Board of Directors”). Information regarding Director Compensation can be found on pages 16 to 21 of this Management Proxy Circular (See “Compensation of Directors”, “Director Summary Compensation Table” and “Incentive Plan Awards). Each director's attendance at Board and Committee meetings can be found on page 21 of this Management Proxy Circular (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, made 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 his or her assets.

Appointment of Auditors

Shareholders will be asked to vote for the reappointment of KPMG LLP, as auditors of the Corporation for the ensuing year, and to authorize the directors of the Corporation to fix their remuneration. A simple majority of the votes cast at the Meeting must be voted in favour thereof. Fees paid to KPMG LLP during the years ended January 31, 2012 and 2011 were as follows:

	2012 (US$)	2011 (US$)
Audit Fees(1)	1,808,046	1,622,777
Audit Related Fees(2)	94,479	162,026
Tax Fees(3)	127,791	121,379
All other Fees(4)	5,046	4,871
Total	2,035,362	1,911,053

(1)	Includes audit and review services.
(2)	Includes IFRS consultation and various audit services required as per legal obligations.
(3)	Primarily tax advisory services.
(4)	Includes review of annual meeting materials.

In the past the directors have negotiated with the auditors of the Corporation on an arm’s length basis to determine the fees to be paid to the auditors. Such fees have been based on the nature and complexity of the matters in question, and the time incurred by the auditors.

The Audit Committee has adopted a policy that requires pre-approval by the Audit Committee of audit services and other services within permissible categories of non-audit services greater than Cdn$100,000.

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.

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Approval of 2012 Restricted Share Unit Plan

Purpose and Participant

As part of a broader plan to provide Frederic de Narp, the President and Chief Executive Officer of HWI, with compensation aligned with market practice, the Corporation is reducing his base salary, increasing his performance based annual incentive and replacing the profit sharing component of the HWI CEO Plan, as described on page 35 of this Management Proxy Circular (see “HWI CEO Plan”), with a new salary based multiple. As part of these changes, the Corporation is replacing Mr. de Narp’s 2011-2012 long term incentive plan value with a one-time award of Restricted Share Units. Accordingly, the Corporation has established a restricted share unit plan (the “2012 Restricted Share Unit Plan”) for Mr. de Narp. Mr. de Narp is the sole participant under the 2012 Restricted Share Unit Plan. The 2012 Restricted Share Unit Plan was approved by the Board of the Corporation on May 22, 2012 and is administered by the Corporation’s Human Resources & Compensation Committee.

The purpose of the 2012 Restricted Share Unit Plan is to support the achievement of the Corporation’s performance objectives; facilitate ownership of the Corporation’s Common Shares by Mr. de Narp; and seek to align his interests with the success of the Corporation and the interests of shareholders of the Corporation.

The Corporation will only make a single one-time award of 101,449 Restricted Share Units to Mr. de Narp.

Number of Restricted Share Unit available for issuance

Under the 2012 Restricted Share Unit Plan, a maximum of 110,000 Common Shares are available for issuance, provided that Common Shares reserved for issuance in respect of Restricted Share Units or Dividend Restricted Share Units which are forfeited will not be available for re-issuance under the 2012 Restricted Share Unit Plan.

The number of Common Shares reserved for issuance represents approximately 0.001% of the Corporation’s total number of issued and outstanding Common Shares as at June 6, 2012. Under no circumstances may the 2012 Restricted Share Unit Plan, together with all of the Corporation’s other share compensation arrangements, result in: (a) the aggregate number of Common Shares issued to insiders of the Corporation within any one year period or issuable to insiders at any time exceeding 10% of the total number of issued and outstanding Common Shares; (b) the number of Common Shares issued to any insider (including such insider’s associates) within any one year period exceeding 5% of the then total number of issued and outstanding Common Shares; or (c) the number of Common Shares reserved for issuance to any one person exceeding 5% of the then total number of issued and outstanding Common Shares (the “Insider Participation Limit”).

Award of Restricted Share Units Prior to Approval of the 2012 Restricted Share Unit Plan

Effective April 23, 2012, the Board approved the award to Mr. de Narp of 101,449 Restricted Share Units, subject to the adoption of the 2012 Restricted Share Plan by the Board, the approval of the Toronto Stock Exchange (“TSX”) and the approval of the shareholders of the Corporation. The number of Restricted Share Units to which Mr. de Narp would be entitled was determined based on the value that the 2011-2012 long term incentive plan payments would have been, being $1,415,550 (Cdn$1,405,075), divided by the closing price of the Corporation’s Common Shares on the TSX on April 20, 2012, being Cdn$13.85, rounded to the nearest whole Common Share.

Under the terms of the 2012 Restricted Share Unit Plan, Mr. de Narp is entitled to receive additional Restricted Share Units (or a cash payment, to the extent that there does not exist a sufficient number of underlying Common Shares, in respect of such additional Restricted Share Units, available for issuance under the Plan) for dividends (if any) paid on the Common Shares (the “Dividend Restricted Share Units”), determined as an amount per Restricted Share Unit equal to the amount of the dividend divided by the closing price of a Common Share on the TSX on the day immediately prior to the dividend payment date, rounded (in aggregate) to the nearest whole Common Share.

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Rights and Restrictions Attached to Restricted Share Units and Dividend Restricted Share Units

Mr. de Narp does not have any rights as a shareholder of the Corporation in respect of the Restricted Share Units or Dividend Restricted Share Units prior to the vesting of such units. Accordingly, Mr. de Narp is not entitled to vote the Common Shares underlying the Restricted Share Units or Dividend Restricted Share Units. Restricted Share Units and Dividend Restricted Share Units are not transferable or assignable except by will or the laws of descent and distribution.

Vesting

All 101,449 Restricted Share Units are scheduled to vest on March 31, 2015, subject to earlier vesting in the event of the occurrence of certain specified events. Dividend Restricted Share Units vest at the same time as the Restricted Share Units in respect of which they were awarded.

Redemption

Restricted Share Units and Dividend Restricted Share Units will be redeemed by the Corporation on the vesting date by issuing one Common Share in respect of each whole Restricted Share Unit and/or Dividend Restricted Share Unit, subject to applicable tax withholdings.

Amendment Provisions

The Board may make amendments to the 2012 Restricted Share Unit Plan without seeking shareholder approval including, but not limited to, housekeeping amendments, amendments to satisfy changes in applicable tax law, amendments to outstanding Restricted Share Units and Dividend Restricted Share Units in the event of certain corporate transactions, specifying practices with respect to applicable tax withholdings, and the addition of covenants for the protection of Mr. de Narp. However, shareholder approval is required for:

(i)	amendments to the number of Common Shares issuable under the 2012 Restricted Share Unit Plan, including an increase to a fixed maximum number of Common Shares or a change from a fixed maximum number of Common Shares to a fixed maximum percentage;
(ii)	any amendment expanding the individuals eligible to be participants in the Plan;
(iii)	any amendment extending the term of a Restricted Share Unit or Dividend Restricted Share Unit or any rights pursuant thereto beyond its original expiry date;
(iv)	any amendments to the Insider Participation Limit;
(v)	the addition of any other provision which results in any person receiving Common Shares while no cash consideration is received by the Corporation;
(vi)	any amendment that would permit Restricted Share Units and/or Dividend Restricted Share Units, prior to vesting, to be transferred or assigned other than for normal estate settlement purposes;
(vii)	amendments to the “Amendment, Suspension or Termination of Plan” section of the 2012 Restricted Share Unit Plan;
(viii)	amendments required to be approved by shareholders of the Corporation under applicable law (including, without limitation, the rules, regulations and policies of the TSX).

If the 2012 Restricted Share Unit Plan is terminated, its provisions will continue as long as Restricted Share Units, Dividend Restricted Share Units or rights thereto remain outstanding.

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Resignation and Other Cessation of Employment

If Mr. de Narp resigns his employment with the Corporation or any of its subsidiaries (other than in circumstances constituting constructive termination): (a) prior to March 31, 2013, he shall forfeit all right, title and interest with respect to all Restricted Share Units and Dividend Restricted Share Units that have not vested prior to the date his employment ceases; (b) on or after March 31, 2013 but before March 31, 2014, 1/3 of the Restricted Share Units and Dividend Restricted Share Units shall vest immediately prior to the date his employment ceases, and the right, title and interest in the remaining 2/3 of the unvested Restricted Share Units and Dividend Restricted Share Units shall be forfeited; and (c) on or after March 31, 2014 but before March 31, 2015, 2/3 of the Restricted Share Units and Dividend Restricted Share Units shall vest immediately prior to the date his employment ceases, and the right, title and interest in the remaining 1/3 of the unvested Restricted Share Units and Dividend Restricted Share Units shall be forfeited.

If Mr. de Narp’s employment with the Corporation or any of its subsidiaries ceases prior to March 31, 2015 for any reason other than his voluntary resignation, including on a termination of his employment within twelve months following a change of control, his Restricted Share Units and Dividend Restricted Share Units shall vest immediately prior to the date his employment ceases.

Shareholders will therefore be asked at the Meeting to pass the following resolution (the “2012 Restricted Share Unit Plan Resolution”), with or without variation, relating to the approval of the 2012 Restricted Share Unit Plan and matters related thereto, as described above:

BE IT RESOLVED THAT:

1.	the adoption of the 2012 Restricted Share Unit Plan of the Corporation as described in the management information circular dated June 6, 2012 is hereby approved, ratified and confirmed;
2.	the reservation for issuance under the 2012 Restricted Share Unit Plan of 110,000 Common Shares is hereby authorized and approved;
3.	the initial grant of 101,449 Restricted Share Units to Frederic de Narp pursuant to the 2012 Restricted Share Unit Plan is hereby approved, ratified and confirmed;
4.	the Corporation is hereby authorized and directed to issue such Common Shares in accordance with the 2012 Restricted Share Unit Plan; and
5.	any one director or officer of the Corporation is hereby authorized and directed for and on behalf of the Corporation to execute or cause to be executed and to deliver or cause to be delivered all such documents, and to do or cause to be done all such acts and things, as such director or officer may deem necessary or desirable in connection with the foregoing resolution.”

Unless a shareholder directs that his or her Common Shares are to be voted against the 2012 Restricted Share Unit Plan Resolution, the management representatives designated in the enclosed form of proxy intend to vote FOR the 2012 Restricted Share Unit Plan Resolution.

11

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 is the former Group Chairman and CEO of Barclays PLC, stepping down December 2006. Prior to joining Barclays in October 1999, Mr. Barrett spent 37 years with the Bank of Montreal including the last 12 years as Chief Operating Officer, Chief Executive Officer and Chairman of Bank. Mr. Barrett is a Director of Goldman Sachs Bank USA, Whittington Investments Limited, Samuel Son & Company, as well as on the Advisory Board of National Bank of Kuwait. In recognition of his business leadership and public service, he was made an officer of the Order of Canada in 1994. Mr. Barrett was Canada’s CEO of The Year in 1995.
Matthew W. Barrett(1)(3)
Age: 67	Areas of Expertise
Oakville, ON, Canada	Finance and Management
Director since 2008	International Business
Independent(4)
	Attendance Record
Securities Held	Board 100%
Common Shares(5): 10,000	Audit Committee 100%
Stock Options: Nil	Nominating & Corporate Governance Committee 100%
Deferred Share Units: 44,171
Value of Shares(6): US$654,778
	Micheline Bouchard is the former President and Chief Executive Officer of ART Advanced Research Technologies, a biomedical company. Prior to that, Ms. Bouchard was Global Corporate Vice-President of Motorola Inc. in the United States 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 and PSP Investment. She is a member of the Order of Canada and of the National Order of Quebec.
Micheline Bouchard(2)(3)
Age: 64	Areas of Expertise
Montreal, QC, Canada	Technology
Director since 2008	International Business
Independent(4)
	Attendance Record
Securities Held	Board 100%
Common Shares(5): 4,000	Human Resources & Compensation Committee 100%
Stock Options: Nil	Nominating & Corporate Governance Committee 100%
Deferred Share Units: 32,458
Value of Shares(6): US$440,677

12

Name of Director	Biography
	David Carey is currently the President of Hearst Magazines, the world's largest publisher of monthly magazines, with significant print and digital operations in the US, Europe and Asia. Previously, Mr. Carey was group president at Condé Nast, where he served as a member of the company’s executive committee and in other positions since 1995. Prior to that, he held business development and marketing positions at Hearst Magazines before becoming the founding publisher of SmartMoney in 1992. Mr. Carey currently serves on the Executive Committee of the Magazine Publishers of America. He is also a board member of the Young Presidents’ Organization and a member of the CUNY Graduate School of Journalism Advisory Committee. Mr. Carey is a graduate of UCLA.
David Carey(2)
Age: 51	Areas of Expertise
Scarsdale, NY, USA	Marketing
Director since 2010	Media and Entertainment
Independent(4)
	Attendance Record
Securities Held	Board 90%
Common Shares(5): Nil	Human Resources & Compensation Committee 67%
Stock Options: Nil
Deferred Share Units: 13,784
Value of Shares(6): US$166,611
	Robert A. Gannicott was appointed the Chief Executive Officer of the Corporation in September 1999, 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. He has chaired the OSC/CIMM Committee to establish reporting guidelines for the diamond industry. He currently serves on the board of The Canadian Polar Commission and Capricorn Minerals Limited, a wholly owned subsidiary of Cairn Energy Plc.
Robert A. Gannicott
Age: 63	Areas of Expertise
Toronto, ON, Canada	Luxury Goods Industry
Chairman and CEO	Metals and Mining
Director since 1992
Not Independent-Management(4)	Attendance Record
	Board 100%
Securities Held
Common Shares(5): 1,114,050
Stock Options: 1,476,000
Value of Shares(6): US$13,465,794
Value of Options(7): US$3,466,506

13

Name of Director	Biography
	Noel Harwerth 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, Chairman of Sumitomo Mitsubishi Banking Europe and Chairman of GE Capital Bank Europe.
Noel Harwerth(1)(2)
Age: 64	Areas of Expertise
London, England	Finance and Management
Director since 2008	International Business
Independent(4)
	Attendance Record
Securities Held	Board 100%
Common Shares(5): 5,000	Audit 100%
Stock Options: Nil	Human Resources & Compensation Committee 100%
Deferred Share Units: 17,938
Value of Shares(6): US$277,257
	Daniel Jarvis served as Vice-Chair and Chief Financial Officer of Concert Properties Ltd., a real estate development and investment firm from 2009 to 2011. From 1989 to 2007 Mr. Jarvis held a number of senior executive positions with Intrawest Corporation; including Executive Vice President and Chief Financial Officer. Mr. Jarvis was instrumental in taking Intrawest public in 1990 and guided the financial strategy of the company as it grew from a regional multi-family real estate developer to become North America's largest resort developer and a leading operator of year-round resorts. Previously, Mr. Jarvis had been Chief Financial Officer of BCE Development Corporation and Treasurer of BCE, Canada's largest telecommunications company. Mr. Jarvis has served on the boards of Concert Properties Ltd., Intrawest Corporation, BCE Development Corporation, New Brunswick Telephone Limited, the Canada Tourism Commission and BC Pavilion Corporation. He holds a Bachelor's degree in Economics from Queen’s University and an MBA from Harvard University.
Daniel Jarvis(1)(3)
Age: 62	Areas of Expertise
Vancouver, BC, Canada	Finance and Management
Director since 2008	Telcom Services
Independent(4)	Risk Management
Securities Held	Attendance Record
Common Shares(5): 4,000	Board 100%
Stock Options: Nil	Audit 100%
Deferred Share Units: 30,446	Nominating & Corporate Governance Committee 100%
Value of Shares(6): US$416,357

14

Name of Director	Biography
	Jean-Marc Loubier is the President and Chief Financial Officer of Fung Heritage Brands Advisory and is the Chief Executive Officer of HKL Holdings, a company conducting reorganizations and facilitating repositioning processes of international companies in Europe and Asia. Mr. Loubier is a non-executive director of Trinity Ltd. and participated in the process of the company listing on the Hong Kong Stock Exchange in November of 2009. Prior to joining HKL, Mr. Loubier was the Chief Executive Officer of ESCADA AG, a company listed on the Frankfurt Stock Exchange, from June 2007 to June 2008 and was a member of its supervisory board and chairman of its strategy committee since November 2006. He had held key managing positions for 16 years in the LVMH Group. Mr. Loubier joined Louis Vuitton Malletier in 1990 as Director of Communications, and was later the Executive Vice President until 2000. He was the President and Chief Executive Officer of Celine from 2000 to 2006. Mr. Loubier was a board member of Comite Colbert, French Association of Luxury Companies from 2000 to 2006. Mr. Loubier has profound international experience in the luxury, fashion and retail industries. Mr. Loubier graduated from Institut d’ Etudes Politiques de Paris, France, and obtained a Master of Business Administration degree from HEC (Hautes Etudes Commerciales), France, in 1983.
Jean-Marc Loubier(1)
Age: 56	Areas of Expertise
Paris, France	Global Management and International Business
Director since 2010	Brand and Product Management
Independent(4)	Retail and Luxury
Securities Held	Attendance Record
Common Shares(5): Nil	Board 100%
Stock Options: Nil	Audit 100%
Deferred Share Units: 11,821
Value of Shares(6): US$142,883
	Laurent E. Mommeja has extensive marketing experience in the luxury goods industry. He currently sits on the Management Board of Emile Hermès SARL the Active Partner of Hermès International SCA. He was the Managing Director of Hermès Maison and President of La Compagnie des Arts de la Table, a subsidiary of Hermès International. 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 for 8 years was President and CEO of Hermès Paris Inc., the United States subsidiary of Hermès International. Mr. Mommeja has had assignments in various different countries during his 29 years with Hermès. He also sits on the boards of Emile Hermès SARL, Hermès Sellier SA and Alain Ducasse Group.
Laurent E. Mommeja(2)(3)
Age: 56	Areas of Expertise
Paris, France	International Business
Director since 2004	Luxury Goods Industry
Independent(4)	Marketing
Securities Held	Attendance Record
Common Shares(5): Nil	Board 80%
Stock Options: Nil	Nominating & Corporate Governance Committee 100%
Deferred Share Units: 11,989	Human Resources & Compensation Committee 100%
Value of Shares(6): US$144,914

Name of Director	Biography
	J. Roger B. Phillimore 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.
J. Roger B. Phillimore
Age: 62	Areas of Expertise
London, England	International Business
Director since 1994	Metals and Mining
Not Independent(4)
	Attendance Record
Securities Held	Board 100%
Common Shares(5): 25,000
Stock Options: 90,000
Deferred Share Units: 52,261
Value of Shares(6): US$933,873
Value of Options(7): US$0

(1)	Member of the Audit Committee.
(2)	Member of the Human Resources & Compensation Committee.
(3)	Member of the Nominating & Corporate Governance Committee.
(4)	“Independent” refers to the standards of independence established under Section 1.2 of Canadian Securities Administrators’ (“CSA”) National Instrument 58-101 – Disclosure of Corporate Governance Practices, Section 1.4 of the CSA National Instrument 52-110 – Audit Committees, Section 303A.02 of the New York Stock Exchange Listed Company Manual, and Section 301 of the Sarbanes-Oxley Act of 2002 (“SOX”). The Board, in its annual review of Director independence, considers employment status of the Director (and his or her spouse and children, if applicable), other board memberships, company shareholdings and business relationships, to determine whether there are any circumstances which might interfere with a Director’s ability to exercise independent judgment. J. Roger B. Phillimore is not independent because of his previous consulting arrangement with the Corporation which terminated on January 31, 2010. He will remain so until February 1, 2013.
(5)	“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.
(6)	“Value of Shares” represents the total market value of the Common Shares and DSUs held by each nominee as of January 31, 2012. Value is determined by multiplying the number of Common Shares and DSUs held by each nominee as of May 15, 2012 by the closing price of the Corporation’s Common Shares on the TSX on such date (Cdn$12.17) (in this section the “Closing Price”), converted at the May 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 May 15, 2012 by the difference between the Closing Price on the TSX and the exercise price of such options, converted at the May Exchange Rate.

Compensation of Directors

The Nominating & Corporate Governance Committee reviews the adequacy and form of compensation for non-executive directors at the Corporation on an annual basis with the goal that it:

Remains competitive in light of the time commitments required from directors, and

Aligns directors’ interests with those of the shareholders.

In addition to directors’ responsibilities and time commitment, this review also takes into account director remuneration of other Canadian companies. These reviews are conducted with the assistance of compensation consultants, but the decisions are made by, and are the responsibility of, the Nominating & Corporate Governance Committee, and may reflect factors and considerations other than the information and recommendations provided by its consultants. The Nominating & Corporate Governance Committee ultimately recommends the directors’ compensation to the Board, for approval.

16

The Nominating & Corporate Governance Committee is composed entirely of unrelated and independent directors, namely Daniel Jarvis (Chair), Matthew W. Barrett, Micheline Bouchard and Laurent E. Mommeja. The biographies of the directors can be found on pages 12 to 16 of this Management Proxy Circular (see “Nominees for Election to Board of Directors”). The Nominating & Corporate Governance Committee’s responsibilities are set out in its Charter, a summary of which can be found on pages 25 and 26 of this 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.

Directors who are not officers or employees of the Corporation or any of its subsidiaries are compensated for their services as directors through a combination of retainer and meeting fees and DSUs. A DSU is a notional share that has the same value as a Common Share. DSUs earn dividend equivalents at the same rate as dividend paid on Common Shares. DSUs are paid out when directors retire from the Board. A full description of DSUs is on page 19 of this Management Proxy Circular. Robert A. Gannicott, the Chief Executive Officer, is the only management director and does not receive compensation for his services as a director.

Until the most recently completed financial year ended January 31, 2012 (“Fiscal 2012”), no changes in the amount of director compensation (annual cash retainers and annual DSU grants) had been made since 2007. In Fiscal 2012, Meridian Compensation Partners LLC (“Meridian”), the Corporation’s compensation consultant, reviewed the director’s compensation and recommended changes to meet competitive range of current market levels and practices in Canada. The Nominating & Corporate Governance Committee recommended such changes to the Board. Details regarding the changes made to directors’ compensation follow below. On April 6, 2011, the Nominating & Corporate Governance Committee recommended, and the Board approved, the following changes for Fiscal 2012:

An annual retainer of Cdn$20,000 for the Lead Director

An increase in the annual retainer for the Chairman of the Human Resources & Compensation Committee from Cdn$5,000 to Cdn$10,000.

On January 11, 2012, the Nominating & Corporate Governance Committee recommended, and the Board approved the following additional changes for the fiscal year ended January 31, 2013 (“Fiscal 2013”):

Annual grants of DSUs to directors were discontinued

Directors will be entitled to an initial grant of Cdn$50,000 in DSUs upon joining the Board (formerly a fixed number of 2,500 DSUs)

The annual cash retainer payable to directors was increased from Cdn$60,000 to Cdn$80,000

The share ownership guidelines were amended to provide that all directors, within five years of January 12, 2012, or within five years of joining the Board in the case of new directors, must have stock ownership of a minimum of three times the annual cash retainer. One half of such ownership may be in DSUs, but the remaining one half must be in actual share ownership.

In conducting its review of compensation, the Nominating & Corporate Governance Committee examined the mix and level of compensation for directors to the mix and level for directors of both:

1.	A group of smaller/mid-cap Canadian public companies that are generally similar to the Corporation in scope, with market capitalization within the range of Cdn$0.6 billion to Cdn$1.4 billion; and
2.	A group of public luxury goods and upscale retail companies in Canada and the United States. The median market capitalization of the study group was US$1.5 billion.

In addition, competitive information from general industry survey data was used as additional reference points, including data from Hewitt Associates Analysis of Outside Directors Compensation (U.S.) and NACD Director Compensation studies.

17

The following table sets out the non-executive directors’ compensation, payable in four equal quarterly installments, for Fiscal 2012 and, effective February 1, 2012, compensation of directors for Fiscal 2013:

Compensation	For fiscal year ended January 31, 2012(1)	For fiscal year ended January 31, 2013(1)
Board Service
Annual cash retainer (all or portion may be taken in the form of DSUs (see “Deferred Share Unit Plan” on page 19)	Cdn$60,000	Cdn$80,000
Meeting fee	Cdn$1,500	Cdn$1,500
Annual equity grant	1,500 DSUs	Nil
Committee Service
Annual Chair's retainer for Audit Committee	Cdn$15,000	Cdn$15,000
Annual Chair's retainer for Human Resources & Compensation Committee	Cdn$10,000	Cdn$10,000
Annual Chairman’s retainer for Nominating & Corporate Governance Committee	Cdn$5,000	Cdn$5,000
Meeting fee	Cdn$1,500	Cdn$1,500
Board Leadership
Annual Lead Director’s retainer	Cdn$20,000	Cdn$20,000
Other
Initial equity grant	2,500 DSUs	Cdn$50,000 (paid in DSUs)
Travel fee (for out-of-province)	Cdn$1,500	Cdn$1,500
Meeting expenses	Reimbursement of meeting expenses	Reimbursement of meeting expenses
Share ownership
Guideline	Cdn$200,000	3 x annual cash retainer

(1) Directors can elect to receive all or a portion of their cash remuneration in the form of DSUs

Director Summary Compensation Table

The following table sets forth the compensation awarded, paid to or earned by the non-executive directors of the Corporation during Fiscal 2012.

Name	Fees Earned (US$)(1)	Share- Based Awards (US$)	Option- Based Awards (US$)	Non-Equity Incentive Plan Compensation (US$)	Pension Value (US$)	All Other Compensation (US$)	Total (US$)
Matthew W. Barrett	92,348	21,117	Nil	Nil	Nil	Nil	113,465
Micheline Bouchard	105,469	21,117	Nil	Nil	Nil	Nil	126,586
David Carey	77,209	39,243	Nil	Nil	Nil	Nil	116,452
Noel Harwerth	110,515	21,117	Nil	Nil	Nil	Nil	131,632
Daniel Jarvis	125,149	21,117	Nil	Nil	Nil	Nil	146,266
Jean-Marc Loubier	90,834	48,976	Nil	Nil	Nil	Nil	139,810
Laurent E. Mommeja	90,834	21,117	Nil	Nil	Nil	Nil	111,951
J. Roger B. Phillimore	81,751	21,117	Nil	Nil	Nil	Nil	102,868

(1) Fees earned are converted into United States dollars at the Average Exchange Rate.

18

The breakdown of the fees earned for the non-executive directors, and the percentage of the total fees taken in DSUs, is as follows (all amounts converted into United States dollars using the Average Exchange Rate):

Directors	Board Retainer (US$)	Committee Chair Retainer (US$)	Board Meeting Fees (US$)	Committee Meeting Fees (US$)	Travel Fees (US$)	Total Fees Earned (US$)	% and Value of Retainer & Meeting Fees Taken in DSUs
							%	(US$)
Matthew W. Barrett	60,556	N/A	13,625	16,653	1,514	92,348	72(1)	66,612
Micheline Bouchard	60,556	10,093	13,625	13,625	7,570	105,469	0	Nil
David Carey	60,556	N/A	12,111	3,028	1,514	77,209	100	77,209
Noel Harwerth	60,556	15,139	13,625	15,139	6,056	110,515	25	27,629
Daniel Jarvis	60,556	25,232	13,625	16,653	9,083	125,149	50	62,575
Jean-Marc Loubier	60,556	N/A	13,625	9,083	7,570	90,834	100	90,834
Laurent E. Mommeja	60,556	N/A	10,597	13,625	6,056	90,834	0	Nil
J. Roger B. Phillimore	60,556	N/A	13,625	N/A	7,570	81,751	0	Nil

(1) Matthew Barrett received 100% of his retainer and meeting fees in DSUs from February 1, 2011 until October 31, 2011. Effective November 1, 2011, he elected not to receive his retainer and meeting fees in DSUs.

Deferred Share Unit Plan

Effective as of February 1, 2004, the Corporation adopted a Deferred Share Unit Plan (the “DSU Plan”) for its directors. On September 1, 2010, the DSU Plan was amended to be compliant with the requirements of Section 409A of the United States Internal Revenue Code of 1986, as amended, and regulations and guidance issued thereunder.

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.

During Fiscal 2012, non-executive directors received an annual grant of 1,500 DSUs under the DSU Plan. The annual grant of DSUs has been discontinued for Fiscal 2013. Non-executive directors will now receive an initial grant of $50,000 in DSUs when they are first appointed to the Board.

Evaluation of Board Performance

An annual formal Board, Committee and individual director evaluation, including a peer review, is conducted. This evaluation is conducted firstly by having Board members complete a written survey which is designed to assess the Board’s effectiveness as a whole, and the effectiveness and contribution of its committees and individual directors. These surveys are sent to the Lead Director, and a summary of the responses is compiled. At the Board meeting in January, 2012, the Lead Director summarized the results of the survey for Fiscal 2012.

19

Share Ownership Guidelines

In 2004, the Corporation adopted share ownership guidelines for directors, which required 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. For Fiscal 2013, the guidelines were amended to provide that all directors within five years of January 12, 2012, or within five years of joining the Board in the case of new directors, must have, and retain, stock ownership of a minimum of three times the annual cash retainer. One half of such ownership may be in DSUs, but the remaining one half must be in actual share ownership.

All of the directors have complied with the Fiscal 2012 share ownership guidelines, with the exception of David Carey and Jean-Marc Loubier, both of whom were elected to the Board in 2010, and are in the process of complying. The following table sets forth the equity ownership (including DSUs) of each director in the Corporation as of January 31, 2012:

Directors	Years of Service	Value of Common Shares (Cdn$)(1)	Value of DSUs (Cdn$)(1)	Total (Cdn$)
Matthew W. Barrett	4 Years	117,300	518,126	635,426
Micheline Bouchard	4 Years	46,920	380,732	427,652
David Carey(2)	1.5 Years	N/A	161,686	161,686
Robert A. Gannicott	18 Years	13,067,807	N/A	13,067,807
Noel Harwerth	4 Years	58,650	210,413	269,063
Daniel Jarvis	4 Years	46,920	357,132	404,052
Jean-Marc Loubier(2)	1.5 Years	N/A	138,660	138,660
Laurent E. Mommeja(3)	8 Years	N/A	140,631	140,631
J. Roger B. Phillimore	17 Years	293,250	613,022	906,272

(1)	Based on the last trading price of the Common Shares on the TSX prior to the close of business on January 31, 2012, being Cdn$11.73.
(2)	In the process of complying with the share ownership guidelines.
(3)	Mr. Mommeja has complied with the Fiscal 2012 share ownership guidelines of the Corporation, as his adjusted cost base of his DSUs is Cdn$355,157.

Incentive Plan Awards

Outstanding Share-Based Awards and Option-Based Awards

Name	Option-Based Awards				Share-Based Awards(1)
	Number of Securities Underlying Unexercised Options (#)	Option Exercise Price (Cdn$)	Option Expiration Date (M/D/Y)	Value of Unexercised In-the-Money Options (US$)(2)	Number of Shares or Units of Shares that Have Not Vested (#)	Market or Payout Value of Share-Based Awards that Have Not Vested (US$)	Market or Payout Value of Vested Share-Based Awards Not Paid Out or Distributed (US$)
Matthew W. Barrett	Nil	N/A	N/A	N/A	N/A	NIL	516,675
Micheline Bouchard	Nil	N/A	N/A	N/A	N/A	NIL	379,666
David Carey	Nil	N/A	N/A	N/A	N/A	NIL	161,234
Noel Harwerth	Nil	N/A	N/A	N/A	N/A	NIL	209,824
Daniel Jarvis	Nil	N/A	N/A	N/A	N/A	NIL	356,132
Jean-Marc Loubier	Nil	N/A	N/A	N/A	N/A	NIL	138,272
Laurent E. Mommeja	Nil	N/A	N/A	N/A	N/A	NIL	140,237
J. Roger B. Phillimore	65,000 25,000	23.35 26.45	02/05/2012 04/17/2013	Nil Nil	N/A	NIL	611,605

(1) Value attributed to DSUs held by directors on January 31, 2012 based on the last trading price of the Common Shares on the TSX prior to the close of business on January 31, 2012, being Cdn$11.73, converted into United States dollars using the Year-End Exchange Rate.

20

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	21,117	Nil
Micheline Bouchard	Nil	21,117	Nil
David Carey	Nil	39,243	Nil
Noel Harwerth	Nil	21,117	Nil
Daniel Jarvis	Nil	21,117	Nil
Jean-Marc Loubier	Nil	48,976	Nil
Laurent E. Mommeja	Nil	21,117	Nil
J. Roger B. Phillimore	Nil	21,117	Nil

(1) These amounts represent the annual grants of DSUs converted into United States dollars using 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 2012. Robert A. Gannicott 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	8	2	10
Audit Committee	6	0	6
Nominating & Corporate Governance Committee	4	1	5
Human Resources & Compensation Committee	3	0	3

Summary of Attendance of Directors

	Board Meetings Attended	Committee Meetings Attended
		Audit	Nominating & Corporate Governance	Human Resources & Compensation
Matthew W. Barrett	10 of 10	6 of 6	5 of 5	N/A
Micheline Bouchard	10 of 10	N/A	5 of 5	3 of 3
David Carey	9 of 10	N/A	N/A	2 of 3
Robert A. Gannicott	10 of 10	N/A	N/A	N/A
Noel Harwerth	10 of 10	6 of 6	N/A	3 of 3
Daniel Jarvis	10 of 10	6 of 6	5 of 5	N/A
Jean-Marc Loubier	10 of 10	6 of 6	N/A	N/A
Laurent E. Mommeja	8 of 10	N/A	5 of 5	3 of 3
J. Roger B. Phillimore	10 of 10	N/A	N/A	N/A

21

Directors’ and Officer’s Liability Insurance

The Corporation maintains a directors' and officers' liability insurance program with a total limit of $60,000,000 that is subject to deductibles between $100,000 and $250,000. The policy is renewed annually. The current policy has an annual premium of $626,640 and expires September 30, 2012.

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.

Retirement Policy

The Corporation does not have a retirement policy in place for the directors.

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 and accuracy of financial statements, compliance with legal and regulatory requirements, the qualifications of the independent auditors and their performance, and the performance of the internal audit function. The Audit Committee serves as an independent and object party to monitor and be custodian of the Corporation’s operational policies, oversees the Corporation’s process for identifying and managing enterprise risk, and reviews and appraises the audit activities of the Corporation’s independent auditors and the internal audit function.

In the fiscal year, both 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 8, 2011, and by the Nominating & Corporate Governance Committee on January 11, 2012. The Charter is attached as Appendix 1 to the Corporation’s Annual Information Form, and is available on the Corporation's website.

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:

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reviewed with management and the independent 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;

arranged for and reviewed the reports provided to the Committee by management and the independent 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 independent auditors without management present, and arranged for the independent auditors to be available to attend Committee meetings;

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

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

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

approved its report for disclosure in this Management Proxy Circular.

The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2012.

This report has been approved by the members of the Audit Committee: Noel Harwerth (Chair), Matthew W. Barrett, Daniel Jarvis and Jean-Marc Loubier.

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 2012, both 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 11, 2012. The Charter is available on the Corporation's website.

To assist in the timely fulfillment of its Charter, the Human Resources & Compensation 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:

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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 performance metrics for Fiscal 2012 and the targets and goals for each of those metrics;

the performance of Chief Executive Officer (“CEO”) of the Corporation and the CEO and President of HWI and their direct reports;

the base salary merit increases for direct reports to the CEO of the Corporation and the President and CEO of HWI, respectively, and officers and employees earning in excess of $250,000;

the base salary merit increased for CEO;

the Fiscal 2013 base salary merit increase budget;

the recommendation for salaries, annual incentive bonuses, long term incentive awards, budgets, organization and manpower plans, and succession planning for the Chief Executive Officer and his direct reports;

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

the objectives, performance appraisal and compensation of the Chief Executive Officer;

reviewed the compensation consultant’s performance, approved their re-appointment and established the compensation consultant’s budget;

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

reviewed the Key Successors Development Plans

reviewed its performance, and reported to the Board thereon;

reviewed, and recommended to the Board, the “Compensation Discussion and Analysis” included in this Management Proxy Circular; and

approved its report for disclosure in this Management Proxy Circular;

Succession Planning

The Human Resources & Compensation Committee annually reviews and assesses the Talent Management and Development programs to enhance individual effectiveness and preparedness for greater responsibilities. As part of this planning process, the Committee reviews management’s specific plans and updates to the Key Successors Development Plans. Succession planning is conducted for the CEO position and for all employees that are seen to have potential to succeed to selected Vice President positions and up, and recommendations are made to the Board in support of succession planning as deemed appropriate.

Say on Pay

As part of the Corporation’s commitment to strong corporate governance practices, the Human Resources & Compensation Committee, the Nominating and Corporate Governance Committee and the Board have voluntarily committed to adopting an advisory vote on the board’s approach to executive compensation in 2013. The 2013 ‘‘say on pay’’ vote will give shareholders an opportunity to express views on our Fiscal 2013 compensation arrangements.

The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2012.

This report has been approved by the members of Human Resources & Compensation Committee: Micheline Bouchard (Chair), David Carey, Noel Harwerth and Laurent E. Mommeja.

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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 applicable codes of best practice of corporate behaviour and conduct for comparable issuers and to recommend to the Board the director nominees to be put before the shareholders at each annual meeting.

In 2012, 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 12, 2012. 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;

considered the effectiveness of the Board as a whole, the Committees of the Board and the contribution of individual members

reviewed Director Self Evaluations

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 share ownership and made recommendations to the Board;

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;

Guidelines and responsibilities for Committee Chairs;

Corporate Governance Guidelines;

Policy on Corporate Disclosure, Confidentiality and Employee Trading;

Policy on Insider Trading;

Corporate Security Policy;

Whistleblower Protection Policy; and

Code of Ethics and Business Conduct;

reviewed the DSU policy and awarded DSUs;

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;

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

reviewed its performance, and reported to the Board thereon; and

approved its report for disclosure in this Management Proxy Circular.

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The Committee is satisfied that it has appropriately fulfilled its mandate for Fiscal 2012.

This report has been approved by the members of the Nominating & Corporate Governance Committee: Daniel Jarvis (Chair), Matthew W. Barrett, Micheline Bouchard and Laurent E. Mommeja.

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, the Group Chief Financial Officer, the former Chief Financial Officer, and the three most highly compensated executive officers (other than the Chief Executive Officer and Chief Financial Officer), during the most recently completed financial year (collectively, the “Named Executive Officers”). For Fiscal 2012, our Named Executive Officers were:

Robert A. Gannicott, Chief Executive Officer of the Corporation
Cyrille Baudet, Group Chief Financial Officer of the Corporation
Alan S. Mayne, Former Chief Financial Officer of the Corporation
Frederic de Narp, President and Chief Executive Officer of HWI
James R.W. Pounds, Executive Vice-President, Buying and Sourcing of the Corporation
Raymond N. Simpson, Executive Vice-President of the Corporation

Executive Summary

1.	Fiscal 2012 Financial Performance
		The Corporation’s executive compensation program and compensation of the Named Executive Officers are tied to the performance of the Corporation. For those Named Executive Officers with group financial metrics, being measures related to the consolidated financial performance of the Corporation (the “Group Financial”), performance was based on consolidated operating profit. The Corporation’s consolidated operating profit was $56.5 million for Fiscal 2012. For those Named Executive Officers with luxury brand segment metrics, being measures related to the performance of the Corporation’s luxury brand segment (the “Luxury Brand Segment”), performance was based on sales, gross margins and selling, general and administrative expenses (“SG&A”). The Luxury Brand Segment generated sales of $411.9 million, gross margins of $188.1 million and SG&A of $168.6 million for Fiscal 2012. For those Named Executive Officers with mining segment metrics, being measures related to the performance of the Corporation’s mining segment (the “Mining Segment”), performance was based on sales and SG&A. The Mining Segment generated sales of $290.1 million and SG&A of $13.5 million for Fiscal 2012. Overall, the performance results were deemed to be strong, which is reflected in the overall near target bonus payments.
2.	Highlights of the CEO’s 2012 Performance and Compensation
		Mr. Gannicott’s total compensation for Fiscal 2012 was $4,309,294, compared to $3,661,713 in the fiscal year ended January 31, 2011 (“Fiscal 2011”). The change in total compensation is primarily as a result of the increase of the long term incentive compensation, which is based on individual and business performance, market competiveness, and overall market performance.
3.	Key Compensation Actions for Fiscal 2012
		Introduction of a “profit cap” structure on executive bonuses to better reflect affordability and apply a rigorous pay-for-performance design; aggregate bonuses, as initially determined based upon the metrics applicable to the various executives, would not be allowed to exceed 10% of the Corporation’s consolidated operating profit for the fiscal period.

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Adoption of share ownership guidelines for selected executives.

No changes to base compensation for the Named Executive Officers.

Amended the Human Resources & Compensation Committee Charter to include the responsibility of reporting to the Board on the Corporation’s policies and practices in compensating employees as such policies and practices relate to risk management practices and risk-taking incentives.

Compensation Governance: Senior Officers’ Compensation

The Human Resources & Compensation Committee recommends the senior officers’ compensation to the Board for approval. The Human Resources & Compensation Committee is composed entirely of unrelated and independent directors, namely, Micheline Bouchard (Chair), David Carey, Noel Harwerth and Laurent E. Mommeja. The biographies of the directors can be found on pages 12 to 16 of this Management Proxy Circular (see “Nominees for Election to Board of 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 23 of this 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.

To ensure the Human Resources & Compensation Committee has the expertise to carry out its mandate, the Nominating & Corporate Governance Committee determines appropriate orientation and education programs for new Board and Committee members and the continued development of all members of the Board. All of the Committee members have gained experience in human resources and compensation matters; specifically, the Committee members have the following skills:

Human resources – experience with benefit, pension and compensation programs (in particular, executive compensation)

Risk management – knowledge and experience with internal risk controls, risk assessments and reporting

Executive leadership – experience as senior executive/officer of a public company or major organization.

In addition, continuing education helps the Committee members keep abreast of industry developments and changing governance issues and requirements. The following is a list of the internal and external conferences, seminars, courses and site tours that our Committee members attended during the year:

Institute of Corporate Directors courses

Updates and presentations from Meridian

Site visits to selected Retail Salons and to the Toronto sorting facility

Independent Consultant

The Human Resources & Compensation Committee engaged Meridian as an independent consultant to provide the Committee with support on determining levels of executive compensation. Meridian has provided such services for the fiscal periods of the Corporation commencing February 1, 2010 to January 31, 2012, including:

Compensation philosophy validation;

Market data and other market intelligence, including benchmarking analysis of executive pay levels;

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.

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The decisions made by the Human Resources & Compensation Committee are the responsibility of the Human Resources & Compensation Committee, and may reflect factors and considerations other than the information and recommendations of the Human Resources & Compensation Committee’s independent consultant.

Fees paid to Meridian during the years ended January 31, 2012 and 2011 were as follows:

	Fiscal 2012(Cdn$)(1)	Fiscal 2011 (Cdn$)(1)
Executive Compensation-Related Fees(2)	108,200	147,531
All other Fees	Nil	Nil
Total Fees	108,200	147,531

(1)	Fees inclusive of GST/HST;
(2)	Includes executive compensation work and review and design of non-executive directors’ compensation for the Nominating & Corporate Governance Committee

Meridian did not perform any other services for the Corporation, its affiliated or subsidiary entities, or any of its directors or members of management during the foregoing fiscal periods. The Human Resources & Compensation Committee confirms annually the independence of its advisor and reviews whether the work provided by the independent consultants raise any conflict of interest. The Human Resources & Compensation Committee determined that Meridian did not have any such conflicts in Fiscal 2012, and also determined that they were independent.

Compensation Philosophy and Strategy

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 corporate performance with compensation that has mid and long-term growth potential, while recognizing that the executives work as a team to achieve corporate results.

Components of Compensation

The current compensation program is comprised of the following main components. The Human Resources & Compensation Committee annually reviews each component and relevant competitive factors and makes its determinations based on corporate, business unit and individual performance, taking into account leadership abilities, retention risk and succession plans.

Corporate Compensation Program at a glance
Component	What it pays for		How it’s determined
Base salary	•	Fixed compensation to account for individual’s value in the market	•	Market driven
	•	Attract/retain the best talent	•	Confirmed near beginning of year
STIP (annual incentive bonus)	•	Variable compensation that rewards individual contribution to actual group & segment short term performance	• •	Market-based percentage of salary Target/goals confirmed near beginning of year, final amount determined at year-end based on achievement of Key Performance Indicators
LTIP (long-term incentive)	• • •	Variable compensation Rewards long-term shareholder value creation Pays for future performance and retention	• •	Initially based on multiple of salary and market competitive practice Awards adjusted based on changes in equity value and share price
Benefits	• •	Indirect compensation Attract/retain the best talent	•	Market driven

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Corporate Compensation Program at a glance
Component	What it pays for		How it’s determined
Stock Ownership	• •	Rewards for financial market performance Aligns interest with those of shareholders	•	Share ownership guidelines

Mix of Compensation Elements

To support a strong pay-for-performance orientation, linking each executive’s compensation to the achievement of business results, the Corporation’s compensation strategy provides an appropriate balance of fixed and variable (at-risk) compensation with cash and non-cash (equity) rewards, and short and, for some executives, long term incentives. The overall weighting of total compensation elements reflects the degree to which the Human Resources & Compensation Committee believes that executives at each level of the Corporation’s organizational structure should assume greater compensation risk and reward, reflected by increasing levels of variable compensation. Executives at all levels of the Corporation’s organizational structure would have a mix, and weighting, of fixed and variable compensation. However, the executives at the higher levels of the Corporation’s organizational structure would have more compensation at risk and, therefore, receive higher resulting rewards when corporate performance exceeds targets and lower awards when performance falls short of targets. The charts below illustrate the estimated (target) mix of fixed and variable compensation (excluding benefits) for the Named Executive Officers:

(1)	Long-term incentives for the CEO reflects the grant date value of stock options as described in the Summary Compensation Table.
(2)	Excludes former Chief Financial Officer. Long-term incentives for the President and Chief Executive Officer, HWI reflects the annualized projected payout under the HWI CEO Plan (as described below).

Competitive Positioning of Compensation

Multiple external compensation surveys are used to measure total compensation competitiveness, including general industry survey data from Towers Watson and Aon Hewitt to measure compensation competitiveness for both business segments of the Corporation, and specific retail/wholesale and luxury goods company survey data from Towers Watson to measure compensation competitiveness for the luxury brand group. Combined data for both groups is further reviewed and validated by Meridian, who validates and adds to the data in order to determine overall external competitive compensation practice.

The overall intent of the Corporation is to provide appropriate total compensation opportunity that is competitive with the market in which the Corporation must compete for talent.

When possible, the data is size-adjusted where comparable companies are not available to reflect compensation levels of companies of similar size as the Corporation.

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Subject to the discretion of the Human Resources & Compensation Committee and the Board, the Corporation seeks to position total compensation for its executives, including base salary and annual short term, and long term incentives, approximating the median market data for positions with equivalent responsibilities and scope. For exceptional performance resulting in higher variable compensation payout, the Corporation aims to deliver total compensation at the 75^th percentile where practical.

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.

Performance goals of the Named Executive Officers apply in determining base salary increases, annual incentive awards, and, for the Chief Executive Officer, the quantum of stock option awards.

1.     Base Salaries – An important 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 market survey data and internal position comparisons.

Each year management recommends a base salary increase budget 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 compiled by management and confirmed with Meridian. The Board considers this base salary 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 2012, management recommended, and the Human Resources & Compensation Committee agreed, that: (a) there would not be any increases in salary for the Named Executive Officers and with minor exceptions this would apply to the other key executives; and (b) management was authorized to spend up to 4% of the total salary budget for merit and market-based adjustments for staff. For Fiscal 2013, management recommended, and the Human Resources & Compensation Committee agreed that: (a) there would not be any increases in salary for the Named Executive Officers, with the exception of Mr. Baudet; and (b) management was authorized to spend up to 1.8% of the total salary budget for merit and market-based adjustments for staff.

Named Executive Officer	Fiscal 2012 Salary	Fiscal 2013 Salary	% Increase /(Decrease)
Robert A. Gannicott	Cdn$1,000,000	Cdn$1,000,000	0%
Cyrille Baudet	$350,000	$385,000(2)	10%
Alan S. Mayne(1)	Cdn$148,891(1)	-	N/A
Frederic de Narp	$900,000	$750,000(2)	(17%)
James R.W. Pounds	Cdn$579,000	Cdn$579,000	0%
Raymond N. Simpson	$328,570	$328,570	0%

(1)	Salary pro-rated due to termination of employment.
(2)	Effective April 1, 2012.

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2.     Annual Incentives – A key objective 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 incentive awards. Target annual incentive awards range from 30% to 100% of base salary for the executive group. The annual incentive award can range from no bonus to a maximum of 120% of the target award based on performance achieved. In addition, aggregate executive bonuses as initially determined based upon the metrics applicable to the various executives are not allowed to exceed 10% of the Corporation’s consolidated operating profit for the fiscal period (the “Profit Cap”). The following table provides the annual incentive target range, as a percentage of base salary, for the Named Executive Officers for Fiscal 2012.

Named Executive Officer	Minimum (as a % of salary)(1)	Target (as a % of salary)(1)	Maximum (as a % of salary)(1)
Robert A. Gannicott	0%	100%	120%
Cyrille Baudet	0%	50%	60%
Alan S. Mayne	0%	50%	60%
Frederic de Narp	0%	50%	60%
James R.W. Pounds	0%	40%	48%
Raymond N. Simpson	0%	40%	48%

(1) Payouts are further subject to the Fiscal 2012 Profit Cap.

Performance Goals of Named Executive Officers

80% of the actual annual incentive or bonus compensation for the Chief Executive Officer is determined on the basis of an overall assessment of the achievement of specified segment and group financial targets, and the remainder is based on his individual performance. 70% to 80% of the actual bonus compensation for the other executive officers is determined on the basis of an overall assessment of the achievement of specified Mining Segment, Luxury Brand Segment or Group Financial targets, depending on the responsibilities of the executive, calculated based on the figures contained in the audited financial statements or other objective measures relating to their specific areas of responsibility, and the remainder is based on individual performance.

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: (a) the consolidated operating profit of the Corporation; (b) sales, gross margins, and SG&A of the Luxury Brand Segment; (c) sales and SG&A of the Mining Segment; and (d) individual objectives. The bonus for the Chief Executive Officer may be adjusted up or down from his target bonus, based on achievement of the metrics. The following table sets out the weighting for each of the group, segment and individual components of the Chief Executive Officer’s bonus. For each component, the annual incentive award would range from nil, if 90% or less of the targets were achieved, to a maximum of 120% of the target award if greater than 110% of the targets were achieved. The components are then summed to determine the bonus award.

	Group Financial Metrics	Luxury Brand Segment Metrics	Mining Segment Metrics	Personal Goals
Robert A Gannicott	40%	20%	20%	20%

2.     Other Named Executive Officers - Target bonus awards range from 40% to 50% of base salary for balance of the executive group. Actual bonus compensation is based on the degree to which the Corporation achieved certain metrics. The metrics were selected based on those parts of the business over which the executive had influence.

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Target bonus opportunities for each Named Executive Officer are: Mr. de Narp-50% of his base salary; Mr. Baudet-50% of his base salary; Mr. Mayne-50% of his base salary; Mr. Pounds-40% of his base salary; and Mr. Simpson-40% of his base salary. Alan Mayne did not receive a bonus for Fiscal 2012, as his employment terminated on April 30, 2011. Business objectives for these Named Executive Officers reflected their respective areas of responsibilities. The following table sets out the respective weightings for each Named Executive Officer of the group, segment and individual components of the bonus. For each component, the annual incentive award would range from nil, if 90% or less of the targets were achieved, to a maximum of 120% of the target award if greater than 110% of the targets were achieved. The components are then summed to determine the bonus award.

	Group Financial Metrics	Luxury Brand Segment Metrics	Mining Segment Metrics	Personal Goals
Cyrille Baudet	40%	20%	20%	20%
Frederic de Narp	30%	40%	0%	30%
James R.W. Pounds	40%	20%	20%	20%
Raymond N. Simpson	40%	0%	40%	20%

Calculation Methodology

Each executive’s annual bonus is determined using the following formula:

Executive’s Group Financial component weighting X Group Financial scorecard multiplier

+  

Executive’s Luxury Brand Segment component weighting X Luxury Brand Segment scorecard multiplier

+  

Executive’s Mining Segment component weighting X Mining Segment scorecard multiplier

+  

Executive’s Personal component weighting X Personal achievement multiplier

X  

Executive’s Target Bonus

X  

Profit Cap Multiplier⁽¹⁾

Annual Performance Bonus

(1) Discussed in more detail on page 31 of this Management Proxy Circular (see “Annual Incentives”) and on page 33 of this Management Proxy Circular (see “Fiscal 2012 Payout”).

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Fiscal 2012 Performance Metrics and Results

The following chart describes the Group Financial, Mining Segment and Luxury Brand Segment performance metrics and results that made up the Fiscal 2012 goals and objectives. Achieving performance at target would result in a multiplier of 100% for each objective.

Executive Component	Performance Metric	Weighting	Actual Results ($000)	Scorecard Multiplier(1)
Group Financial	Operating Profit	100%	$56,531	120%
Luxury Brand Segment	Sales	40%	$411,929	103%
	Gross Margin	30%	$188,056
	SG&A	30%	$168,611
Mining Segment	Sales	50%	$290,114	119%
	SG&A	50%	$13,454

(1) Ranges from 0% if 90% or less of the targets were achieved, to a max of 120% if more than 110% of targets were achieved.

It is the Corporation’s view that disclosure of the performance targets would seriously prejudice the Corporation in the competitive market in which it operates as the targets provide valuable information to the Corporation’s competitors regarding current and future financial and operating plans. It is not the Corporation’s practice to disclose sensitive budget information. Although the performance targets utilized are based upon the Corporation’s current and future financial and operating plans (and the assumptions and financial modeling underlying same), the potential exists that the Corporation may not achieve such targets and as such, it is difficult to assess in advance the likelihood of a Named Executive Office achieving his performance targets.

Fiscal 2012 Payout

The resulting impact of applying the consolidated financial and segment results, and individual performance results, on the target bonus opportunities for the Named Executive Officers are summarized in the table below. In addition, the aggregate bonus pool has been decreased to fall within the “Profit Cap” and has resulted in an approximate 18% reduction in bonuses as initially determined. Individual performance metrics and results for each Named Executive Officer are discussed below. Alan Mayne did not receive a bonus for Fiscal 2012, as his employment terminated on April 30, 2011.

In assessing the Chief Executive Officer’s individual performance against his personal goals, the Board and the Human Resources & Compensation Committee considered the following:

• The Corporation’s objectives and results achieved
• Retail expansion, pricing of rough diamonds, and other strategic initiatives to enhance the Corporation’s capabilities and efficiencies
• The strengthening of the leadership talent and staff capability across the business

Overall, the Board rated Mr. Gannicott’s achievement at 112% of his aggregate performance goals.

In assessing the individual performance of the other Named Executive Officers against their personal goals, the Human Resources & Compensation Committee considered the following:

• The Corporation’s objectives and results achieved
• Mining Segment individual performance objectives were targeted at expanding the rough diamond sorting capabilities and processing through specific implementation of strategic capital projects
• Luxury Brand Segment individual performance objectives were targeted at enhancing organizational capabilities and strengthening the leadership team, and building the brand equity of the Harry Winston franchise

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Overall, the Committee’s rating of the achievement of the aggregate performance goals for the Named Executive Officers are: Mr. Baudet 112% of his goals; Mr. de Narp 107% of his goals; Mr. Pounds 112% of his goals; and Mr. Simpson 116% of his goals.

Named Executive Officer	Bonus Target (US$)	Uncapped Bonus Based on Results (US$)	Bonus After Cap (US$)	Actual Bonus Payout as a % of Target
Robert A. Gannicott(1)	$997,200	$1,120,352	$921,520	92%
Cyrille Baudet(2)	$128,014	$143,823	$118,298	92%
Frederic de Narp	$450,000	$482,345	$396,741	88%
James R.W. Pounds(1)	$230,951	$259,474	$213,424	92%
Raymond N. Simpson	$131,428	$151,816	$124,872	95%

(1)	Converted into United States dollars at the Year End Exchange Rate.
(2)	Prorated based on start date of May 9, 2011.

3.     Long Term Incentives

(a)     RSUs and Changes in Equity Value of HWI - On April 5, 2004, the Corporation adopted a Restricted Share Unit Plan (the “2004 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. In the fiscal year ended January 31, 2010 (“Fiscal 2010”), the Corporation decided to discontinue the granting of RSUs under the 2004 RSU Plan, except for awards made to Mr. Mayne in accordance with his employment contract (see Footnote No. 4 under “Summary Compensation Table” on page 40). The employment contract with Mr. Mayne was terminated on April 30, 2011. In Fiscal 2010, the Corporation utilized stock options as its long term incentive to executives.

In September, 2010, the Corporation implemented two new Long Term Incentive (“LTI”) plans for selected executives of the Corporation and HWI, other than the Chief Executive Officer of the Corporation and the President and Chief Executive Officer of HWI. The first plan, the 2010 Restricted Share Unit Plan, was prepared for selected executives of the Corporation, who are granted RSUs. The second plan, the 2010 LTI Award Plan, was prepared for selected executives of HWI, who are granted LTI Awards. The objective was to devise multi-year plans which are: market-based; fair and equitable to the executives of both the Corporation and HWI; simple to administer; and, understandable to the recipient. The award amount paid under the 2010 Restricted Share Unit Plan is based on the share price of the Corporation when the share units vest. The award amount paid under the 2010 LTI Award Plan is based on the change in the underlying equity value of HWI. Both award amounts are settled in cash.

Under the new plans, the initial determination of a RSU or LTI award for both an executive of the Corporation and a HWI executive is made by the Human Resources & Compensation Committee, based on the executive’s salary multiplied by an appropriate LTI multiplier. In Fiscal 2012, the Human Resources & Compensation Committee applied multipliers for the executives ranging from 0.50 to 1.15.

The LTI multiplier is derived from current North American market competitive practices for comparable executive levels based on market analysis conducted by Meridian, with consideration also for internal equity and the Corporation’s organizational structure. Once the initial determination is made, the executive receives an award which represents a notional or bookkeeping account, the amount of which adjusts with changes in (a) the Corporation’s share price (for the Corporation’s executives) or (b) the equity value of HWI (for HWI’s executives) from the time the award was made to the time of payment and vesting. The awards vest, in both cases, equally over a period of 3 years. Earlier vesting can also occur in the case of death, retirement or Change of Control. The Human Resources & Compensation Committee annually reviews the LTI Plans (and all other long term incentive plans of the Corporation) and reports to the Board on suggestions to modify such plans, as appropriate. When considering the making of a new grant under the Corporation’s LTI Plans or Stock Option Plan, the Human Resources & Compensation Committee takes into account previous grants made under such plans.

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For Fiscal 2012, the following table sets out the multipliers for the Named Executive Officers, and actual RSUs and LTI Awards made:

Named Executive Officer	Target LTI Multiplier (multiple of base salary)	RSUs Granted (# of Units)	Value of RSUs (US$)(1)	LTI Awards Granted (US$)
Cyrille Baudet(2)	1.0	12,300	210,326	140,000
Alan S. Mayne	1.15	-	-	-
James R.W. Pounds	1.15	40,620	694,587	-
Raymond N. Simpson	0.5	9,620	164,498	-

(1)	The value of these RSUs was determined based on a share price of Cdn$16.39 on April 7, 2011 (Human Resources & Compensation Committee approval date), the average of the closing price of the Corporation’s common shares on the five trading days prior to April 7, 2011, and was converted into United States dollars at the Year-End Exchange Rate.
(2)	Mr. Baudet participates in both the 2010 Restricted Share Unit Plan and the 2010 LTI Award Plan.

(b)     Stock Options – Prior to Fiscal 2011, stock options were granted to selected officers (including Named Executive Officers) under the Corporation’s Stock Option Plan, as described on pages 45 and 46 of this Management Proxy Circular (see “Securities Authorized for Issuance under Equity Compensation Plans”). The size of these options was based, in part, on the historical performance of the Corporation measured against defined targets. These options generally had a ten-year term and an exercise price equal to the closing price of the Common Shares of the Corporation on the TSX on the trading day immediately preceding the date of grant, 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 (the “Market Price”).

Beginning in Fiscal 2011, stock options have only been granted to the Chief Executive Officer of the Corporation, who does not participate in the new LTI plans described above.

In Fiscal 2012, options to acquire a total of 350,000 common shares were granted to the Chief Executive Officer of the Corporation at an exercise price of $16.70 per share. Such option grant represents 0.004% of the outstanding shares of the Corporation on January 31, 2012. These options have a 5-year term, and will vest ratably over the three years following the date of grant (April 7, 2011), the first tranche vested on March 31, 2012. The amount of the option grant was determined by the Human Resources & Compensation Committee, and approved by the Board, with reference to a market-based economic value based on a value of the grant using the Black Scholes valuation model. In particular, the award size determination considered the median competitive range for long-term incentive values for other chief executive officers from the external compensation surveys described earlier (see “Competitive Positioning of Compensation”), as well as the Corporation’s Fiscal 2011 performance and the Chief Executive Officer’s contribution to that performance.

Additional information regarding the Corporation’s Stock Option Plan can be found on pages 45 and 46 of this Management Proxy Circular (see “Securities Authorized for Issuance under Equity Compensation Plans”).

(c)     HWI CEO Plan – On January 4, 2010, Mr. Frederic de Narp commenced employment as President and Chief Executive Officer of HWI. Mr. de Narp’s employment contract provides for a specific LTI program (the “HWI CEO Plan”). Under the HWI CEO Plan, HWI maintains a long term incentive plan account (“LTIP Account”) for Mr. de Narp. Credits to the LTIP Account are conditional upon Profit Results over specific profit goals. For the purposes of the HWI CEO Plan, “Profit Results” means the gross profit, minus SG&A expenses of HWI and its subsidiaries on a consolidated basis for a fiscal year for which the LTIP Account is being credited, less the cost of capital for that fiscal year. The amount, if any, credited to the LTIP Account will be 5% of the Profit Results and will be determined within 90 days of the end of each fiscal year if Mr. de Narp is then employed by HWI. Commencing April 30, 2012, and on each subsequent April 30th, HWI will pay Mr. de Narp one-third of the balance of the LTIP Account, provided he is then employed by HWI. The HWI CEO Plan will be in effect until the fiscal year ending January 31, 2015, at which time the arrangement will be subject to review by either Mr. de Narp or HWI, and failing any resolution of the matter within 30 days of either party requesting a review, the HWI CEO Plan would, at the request of the party requesting a review, terminate. Mr. de Narp would then be entitled to participate in any incentive program implemented from time to time by HWI for its senior executives.

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If the HWI CEO Plan terminates after January 31, 2015, the balance remaining in the LTIP Account will be paid in three equal tranches on April 30, 2015, 2016 and 2017, provided Mr. de Narp is then employed by HWI on such dates.

In Fiscal 2012, based on Fiscal 2011 Profit Results of HWI, no amount was credited to the LTIP Account. Accordingly, on April 30, 2012, no amount was paid to Mr. de Narp under the HWI CEO Plan by HWI (see “Compensation Structure for President and Chief Executive Officer, HWI” below for changes to the structure of Mr. de Narp’s compensation).

4.     Benefits – Benefits for the Named Executive Officers, including life insurance, health and dental plans, and short and long term disability plans, and defined contribution retirement plans are maintained at a level that is considered competitive and similar to what all employees receive (see “Pension Plan Benefits and Deferred Compensation Plan” on page 41 of this Management Proxy Circular).

Fiscal 2013 Changes to Compensation Policies and Practices

Base Salaries
For Fiscal 2013, management recommended, and the Human Resources & Compensation Committee agreed to the following base salary changes:

Named Executive Officer	Base Salary
Robert A. Gannicott	Hold at Cdn$1,000,000
Cyrille Baudet	Increase from $350,000 to $385,000(1)
Frederic de Narp	Decrease from $900,000 to $750,000(1)
James R.W. Pounds	Hold at Cdn$579,000
Raymond N. Simpson	Hold at $328,570

(1) Effective April 1, 2012.

Annual Bonus
The Corporation is reviewing new targets and weightings for the Named Executive Officers (Group Financial, Luxury Brand Segment, Mining Segment and individual), specifically to determine the focus around individual measures for individual performance. The Profit Cap will be retained so that bonuses paid will not exceed more than 10% of the consolidated operating profit.

Compensation Structure for President and Chief Executive Officer, HWI
The Corporation reviewed the compensation structure of the President and Chief Executive Officer of HWI to ensure alignment with the management team and corporate objectives. The Corporation determined that the objectives of the compensation structure for the President and Chief Executive Officer, HWI are to: (i) motivate the executive to create value for shareholders; (ii) deliver a total remuneration package that is market-competitive and performance based; and (iii) align his pay with the Luxury Brand Segment management team. Accordingly, subject to the ratification and approval of the 2012 Restricted Share Unit Plan described on page 9 of this Management Proxy Circular, the following changes will be made to the compensation structure of the President and Chief Executive Officer, HWI:

• Repositioning of base salary from $900,000 to $750,000, commencing April 1, 2012
• Adjustment of annual incentive bonus target from 50% to 100% of (new) base salary
• Elimination of the current long-term incentive plan (HWI CEO Plan) to be replaced with the existing LTI plan for executives of HWI for alignment with the other HWI executives, at a target market-based multiplier of two times the (new) base salary
• A single one-time award of 101,449 Restricted Share Units pursuant to the 2012 Restricted Share Unit Plan, subject to shareholder approval

The Corporation believes that under this structure, total cash compensation for the President and Chief Executive Officer of HWI will be in line with the external market for this position and that more of Mr. de Narp’s pay will be at risk based on the achievement of key performance measures.

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Share Ownership Guidelines
The Corporation has introduced Share Ownership Guidelines for selected executive officers in Fiscal 2013 to further align the interests of senior executives with the interests of shareholders. These guidelines apply to the Chairman & Chief Executive Officer, President and Chief Executive Officer of HWI, the Group Chief Financial Officer, selected Executive Vice Presidents, and selected Vice Presidents. The guidelines, as outlined in the table below, can be complied with through the ownership of shares outright (by the executive and immediately family members residing in the same household), and Restricted Share Units issued and held as part of an executive’s long-term compensation (whether vested or not).

Executive Level	Guideline
Chairman and Chief Executive Officer	5 x annual base salary
President and Chief Executive Officer of HWI	2.5 x annual base salary
Selected Executive Vice Presidents, and selected Vice Presidents	1.25 x annual base salary

Guidelines are expressed and determined as a multiple of an executive’s base salary, and then are converted to a fixed number of shares. Participants are required to achieve their assigned guidelines within five years of becoming subject to the guidelines. If a participant’s guideline increases because of a change in title, a five year time frame to achieve the incremental guideline begins in January following the year of the title change.

The Human Resources & Compensation Committee will review compliance with these guidelines annually, and in its sole discretion may impose such conditions, restrictions or limitations on any executive as it determines appropriate in order to achieve the underlying purposes of these guidelines.

Other Compensation Policies of the Corporation

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 executive upon a Change of Control with the continuation of employment of the executive in the event such a Change of Control occurs. As noted on pages 42 to 45 of this Management Proxy Circular under the heading “Termination and Change in 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.

Risk
In Fiscal 2012, the Human Resources & Compensation Committee’s risk oversight activities were formally expanded by amending its Charter to include a mandatory report to the Board on the linkages between the Corporation’s pay practices and risk. In Fiscal 2012, the assessment was conducted by management with the assistance of the Committee’s independent consultant, Meridian. The assessment was based on a scorecard that reviewed 37 dimensions across the following five categories:

• Pay philosophy and governance
• Pay mix and balance
• Incentives and performance measurement
• Stock-based incentives/ownership
• Other policies and provisions

After considering the results of the assessment, the Human Resources & Compensation Committee did not identify any risks arising from the Corporation’s compensation policies and practices that would be reasonably likely to have a material adverse effect on the Corporation.

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Executive Trading Policy
Under the Corporation’s Insider Trading Policy, no officers, directors and employees shall engage in short-term, speculative transactions involving the Corporation’s securities. This would include short sales and buying or selling put or call options or other derivative securities relating to the Corporation’s shares. In the Corporation’s view, such trading is an activity more normally associated with “professional” traders and is, therefore, inconsistent with an insider’s role with, and duties to, the Corporation.

Compensation Clawback
The Corporation is required to comply with the Sarbanes-Oxley Act of 2002, and the rules adopted by the United States Securities and Exchange Commission (“SEC”) pursuant to that Act. In addition, the Human Resources & Compensation Committee intends to examine the requirements, once released, of proposed rules under the United States Dodd-Frank Act in regards to executive recoupment or “clawback” of incentive compensation to consider if a “clawback” policy should be adopted.

Discretion
The Human Resources & Compensation Committee has the authority to set performance measures and targets in relation to incentive programs for executives. It also has the general authority to amend such measures and targets, and the measurement of results to reflect business conditions, circumstances, and events not predicted when setting targets. The application of this authority is at the sole discretion of the Committee. In addition, the Committee does make some qualitative assessments of the individual performance and achievement of personal goals in incentive programs (e.g. assessment of non-financial goals).

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, 2007). 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

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Fiscal Years ended January 31st	2007	2008	2009	2010	2011	2012
Harry Winston Diamond Corporation	$45.35	$24.75	$4.88	$9.83	$10.83	$11.73
Value of $100 Investment	$100.00	$54.58	$10.76	$21.68	$23.88	$25.87
S&P/TSX Composite	31,573.54	32,665.06	22,287.88	29,360.52	36,840.37	34,759.27
Value of $100 Investment	$100.00	$103.46	$70.59	$92.99	$116.68	$110.09

(1) All Dollars Amounts referenced in the performance graph are in Canadian Dollars.

The decline in total shareholder return through Fiscal 2009 was due in part to the reduction in dividend payment amounts and a change in global economic circumstances. However, the performance graph illustrates the continued strong performance of our total shareholder return relative to the index over the course of Fiscal 2010, 2011 and 2012. Our total shareholder return significantly outperformed the index from Fiscal 2010 to 2012, being approximately 140 percent compared to approximately 56 percent for the S&P/TSX Composite Index.

Overall, the compensation levels of our Named Executive Officers reflect the significant success in generating increased total shareholder return for our shareholders for Fiscal 2010, 2011 and 2012. However, over the Fiscal 2010 to 2012 period, the percentage increase in total compensation paid to the Named Executive Officers was significantly less (by about one-half) than the percentage change in total shareholder return to shareholders. Through Fiscal 2010, annual bonuses and long-term incentives were severely impacted by the decrease in share price and Named Executive Officer compensation remained fairly flat, with improvements being seen in Fiscal 2011 as the share price showed strong improvement.

The Human Resources & Compensation Committee is satisfied that the pattern of compensation of the Chief Executive Officer and other executives has reflected the performance of the Corporation against the range of measures used for our incentive compensation plans, and against the market. Overall compensation levels in each of the past several years are within the range determined by the Human Resources & Compensation Committee as appropriate, and are in line with the Corporation’s performance such that the Human Resources & Compensation Committee has concluded that the compensation strategy is working effectively both for shareholders of the Corporation and for the executives.

SUMMARY COMPENSATION TABLE

Summary Compensation Table

The following table sets forth the compensation awarded, paid to or earned by the Named Executive Officers, during Fiscal 2012, Fiscal 2011 and Fiscal 2010.

Name and Principal Position	Year Ended January 31	Salary (US$)	Share-Based Awards (US$)	Option- Based Awards (US$)(1)	Non-Equity Incentive Plan Compensation (US$)		Pension Value (US$)	All Other Compensation (US$)	Total Compensation (US$)
					Annual Incentive Plans	Long- Term Incentive Plans
Robert A. Gannicott Chief Executive Officer	2012	1,009,269(2)	-	2,378,498	921,527(3)	-	-	-	4,309,294
	2011	974,279	-	1,688,931	998,502	-	-	-	3,661,713
	2010	853,615	-	487,316	467,596	-	-	-	1,808,527
Cyrille Baudet Group Chief Financial Officer	2012	247,866	210,326(4)	-	118,298	140,000(4)	-	74,036(5)(6)	790,525
Alan S. Mayne Former Chief Financial Officer	2012	150,271(2)	-	-	-	-	-	1,619,586(8)	1,769,857
	2011	511,496	503,840(4)(7)	-	262,107(3)	-	-	-	1,277,443
	2010	448,148	52,121(4)	242,487	122,744	-	-	-	865,499
Frederic de Narp(9) President and Chief Executive Officer, HWI	2012	900,000	-	-	396,741	-	-	14,700(6)	1,311,441
	2011	900,000	-	-	450,000	-	-	14,700	1,364,700
	2010	69,231	-	-	-	-	-	-	69,231

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Name and Principal Position	Year Ended January 31	Salary (US$)	Share-Based Awards (US$)	Option- Based Awards (US$)(1)	Non-Equity Incentive Plan Compensation (US$)		Pension Value (US$)	All Other Compensation (US$)	Total Compensation (US$)
					Annual Incentive Plans	Long- Term Incentive Plans
James R.W. Pounds Executive Vice-President, Buying and Sourcing	2012	584,367(2)	694,587(4)	-	213,425(3)	-	-	-	1,492,379
	2011	564,108	561,448(4)	-	231,253	-	-	-	1,356,809
	2010	494,243	-	242,487	129,954	-	-	-	866,684
Raymond N. Simpson Executive Vice-President	2012	328,570	164,498(4)	-	124,872	-	-	14,700(6)	632,641
	2011	328,570	143,442(4)	-	131,600	-	-	14,700	618,140
	2010	315,933	-	173,372	59,220	-	-	14,700	563,225

(1)	For the options granted on April 7, 2009, the Corporation used a Black-Scholes option pricing model in accordance with International Financial Reporting Standards (“IFRS”) 2 Share Based Payments. The Corporation used the following assumptions: risk-free rate of 1%, dividend yield of 0%, volatility factor of 51%, and expected life of the options of 5.5 years converted at the April 7, 2009 Exchange Rate. The options were granted at an exercise price of Cdn$3.78 which was higher than the closing price of the Corporation’s shares on the TSX on the date immediately preceding the date of grant. Each option expires ten years after the date of its grant. For the options granted on September 7, 2010, the Corporation used a Black-Scholes option pricing model in accordance with IFRS 2 Share Based Payments. The Corporation used the following assumptions: risk-free rate of 2.13%, dividend yield of 0%, volatility factor of 50%, and expected life of the options of 5.9 years converted at the September 7, 2010 Exchange Rate. The options were granted at an exercise price of Cdn$12.35, being the closing price of the Corporation’s shares on the TSX on the date immediately preceding the date of grant. Each option expires ten years after the date of its grant. For the options granted on April 7, 2011, the Corporation used a Black-Scholes option pricing model in accordance with IFRS 2 Share Based Payments. The Corporation used the following assumptions: average risk- free rate of 2.41%, dividend yield of 0%, volatility factor of 50%, and expected life of the options of 3.5 years. The options were granted at an exercise price of Cdn$16.70, being the closing price of the Corporation’s shares on the TSX on the date immediately preceding the date of grant. Each option expires five years after the date of its grant.
(2)	Converted into United States dollars at the Average Exchange Rate.
(3)	Converted into United States dollars at the Year-End Exchange Rate.
(4)	The table below shows the long term incentive awards outstanding for each Named Executive Officer, and the value of the RSUs at January 31, 2012 converted as applicable into United States dollars at the Year-End Exchange Rate. Details of the Long Term Incentive Plans can be found on page 34 of this Management Proxy Circular (see “Overview of Compensation Programs – Long-term Incentives - RSUs and Changes in Equity Value of HWI”).

LONG TERM INCENTIVES OUTSTANDING AS OF JANUARY 31, 2012

Name	Number of RSUs	Value of RSUs (US$)	LTI Awards (US$)
Robert A. Gannicott	-	-	-
Cyrille Baudet	12,300	143,876	140,000
Alan S. Mayne	-	-	-
Frederic de Narp	-	-	-
James R. W. Pounds	71,306	834,084	-
Raymond N. Simpson	17,460	204,234	-

The table below shows the long term incentive awards granted in Fiscal 2012. The payout value of the RSUs 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.

LONG TERM INCENTIVE AWARDS GRANTED IN FISCAL 2012

Name	Granted	Period until Payout
Baudet, Cyrille	12,300 RSUs	4,100 on March 31, 2012
		4,100 on March 31, 2013
		4,100 on March 31, 2014
Baudet, Cyrille	LTI Award of US$140,000	US$46,667 on March 31, 2012
		US$46,667 on March 31, 2013
		US$46,666 on March 31, 2014
James R. W. Pounds	40,620 RSUs	13,540 on March 31, 2012
		13,540 on March 31, 2013
		13,540 on March 31, 2014
Raymond N. Simpson	9,620 RSUs	3,207 on March 31, 2012
		3,207 on March 31, 2013
		3,206 on March 31, 2014

	RSUs granted in Fiscal 2011 vest one-third on March 31, 2011, and one-third on each anniversary thereafter. The value of these RSUs was determined based on a share price of Cdn$12.85 on September 2, 2010 (Human Resources & Compensation Committee approval date), the average closing price of the Corporation’s common shares on the five trading days prior to September 2, 2010 converted into United States dollars at the September 2, 2010 Exchange Rate of 0.9492. RSUs granted in Fiscal 2012 vest one-third on March 31, 2012, and one-third on each anniversary thereafter. The value of these RSUs was determined based on a share price of Cdn$16.39 on April 7, 2011 (Human Resources & Compensation Committee approval date), the average closing price of the Corporation’s common shares on the five trading days prior to April 7, 2011 converted at the Year-End Exchange Rate.
(5)	This amount includes housing benefit and relocation allowance for Mr. Baudet.
(6)	Includes contribution to the defined contribution 401(k) plan of HWI.

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(7)	The amounts shown for Mr. Mayne represent 5,000 RSUs granted to him each year pursuant to his employment agreement plus additional RSUs granted to him in Fiscal 2010 and 2011. The value of these RSUs was determined based on a share price of Cdn$11.09 on January 21, 2011, the closing price of the Corporation’s common shares on the date of grant converted into United States dollars at the January 21, 2011 Exchange Rate of 1.0046.
(8)	Employment with the Corporation terminated April 30, 2011.
(9)	Mr. de Narp was appointed as the President and Chief Executive Officer of HWI on January 4, 2010.

Incentive Plan Awards

Outstanding Share-Based Awards and Option-Based Awards as at January 31, 2012

Name	Option-Based Awards				Share-Based Awards(1)
	Number of Securities Underlying Unexercised Options (#)	Option Exercise Price (US$)(2)	Option Expiration Date (M/D/Y)	Value of Unexercised In-the-Money Options (US$)(3)	Number of Shares or Units of Shares that Have Not Vested (#)	Market or Payout Value of Share-Based Awards that Have Not Vested (US$)	Market or Payout Value of Vested Share-Based Awards Not Paid Out or Distributed (US$)
Robert A. Gannicott	200,000	23.28	02/05/2012	0	-	-	-
	100,000	26.38	04/17/2013	0
	110,000	41.11	04/07/2014	0
	416,000	3.77	04/07/2019	3,316,460
	300,000	12.32	09/07/2020	0
	350,000	16.65	04/07/2016	0
Cyrille Baudet	N/A	N/A	N/A	N/A	12,300	143,876	-
Alan S. Mayne	N/A	N/A	N/A	N/A	-	-	-
Frederic de Narp	N/A	N/A	N/A	N/A	-	-	-
James R.W. Pounds	50,000	27.52	06/27/2012	0	71,306	834,084	-
	10,000	26.38	04/17/2013	0
	207,000	3.77	04/07/2019	1,650,258
Raymond N. Simpson	100,000	26.38	17/04/2013	0	17,460	204,234	-
	148,000	3.77	04/07/2019	1,179,894

(1)	Share-based awards represent outstanding RSUs. The payment value of the RSUs is based on the last trade of the Common Shares on the TSX prior to the close of business on January 31, 2012, of Cdn$11.73 converted into United States dollars at the Year End Exchange Rate.
(2)	Options are granted in Canadian dollars. The option exercise price has been converted into United States dollars at the Year End Exchange Rate.
(3)	Based on the last trade of the Common Shares on the TSX prior to the close of business on January 31, 2012, of Cdn$11.73 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$)(1)	Share-Based Awards – Value Vested During the Year (US$)	Non-Equity Incentive Plan Compensation – Value Earned During the Year (US$)(2)
Robert A. Gannicott	1,660,228	-	921,527
Cyrille Baudet	-	-	118,298
Alan S. Mayne	-	182,905	-
Frederic de Narp	-	-	396,741
James R.W. Pounds	702,420	229,158	213,425
Raymond N. Simpson	502,213	58,544	124,872

(1)

Represents the dollar value that would have been realized if the options that vested during the year had been exercised on the vesting date. This is calculated by multiplying the number of options that vested during the year by the difference between the closing price of the Common Shares on the TSX on the date of vesting and the exercise price of the options each converted into United States dollars at the vesting date exchange rate of 1.0433 at April 4, 2011 and 1.0147 at September 7, 2011.

(2)

Represents the bonuses awarded for Fiscal 2012.

Pension Plan Benefits and Deferred Compensation Plan

No Named Executive Officer is a member of a defined benefit plan.

No Named Executive Officer is a member of the Corporation’s Canadian registered defined contribution plan whereby the Corporation matches an employee’s contribution to his or her registered retirement savings plan to a maximum of 6% of the employee’s salary and subject to the maximum contribution limits under the Income Tax Act (Canada).

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Named Executive Officers in the United States are eligible to participate in the HWI defined contribution plan, which is a qualified 401(k) plan. Under the 401(k) plan, the United States Named Executive Officers are allowed to contribute up to 6% of their salary, to a maximum of $16,500 for the 2011 calendar year. The executive’s contributions are matched, subject to IRS limits of compensation that can be taken into account for employer matching. For the 2011 calendar year, that amount was capped at $245,000, rendering the maximum contribution allowed for Named Executive Officers in the United States at $14,700.

The following table outlines the change in value of the defined contribution plan holdings of the Named Executive Officers over the course of 2011.

Defined Contribution Plans

Name	Accumulated Value at January 1, 2011 (US$)	Compensatory (US$)(1)	Accumulated Value at December 31, 2011 (US$)(2)
Robert A. Gannicott	-	-	-
Cyrille Baudet	-	-	5,699
Alan S. Mayne	-	-	-
Frederic de Narp	16,500	14,700	47,700
James R.W. Pounds	-	-	-
Raymond N. Simpson	204,599	14,700	237,621

(1)	Contribution by HWI to defined contribution 401(k) plan of HWI.
(2)	Includes investment earnings and employee contributions during calendar year 2011. During calendar year 2011, Mr. Baudet contributed $5,699 to the plan, and Mr. de Narp and Mr. Simpson each contributed $16,500 to the plan.

Furthermore, key executives in the United States are eligible to participate in HWI’s deferred compensation plan, under which a participant may elect to defer salary, sales commission, and incentive compensation or bonus. HWI, in its sole discretion, may make employer discretionary or employer matching contributions to the plan. Participants are fully vested in deferral amounts and all earnings attributable thereto. Payments are made to participants in cash following permissible payment events, including separation from service, payment following death or disability, occurrence of a change in control event or unforeseeable emergency, or a pre-established withdrawal schedule. HWI’s obligations under the plan are unfunded and unsecured promises to pay funds in the future. Currently no Named Executive Officers are contributing to the deferred compensation plan. At the commencement of his employment, HWI agreed with Mr. de Narp to contribute $46,500 per year for each completed year of service to his deferred compensation plan account. However, the plan under which such contributions would be made was not established until Fiscal 2012 and no contributions were made in Fiscal 2012. As a result, the contribution to Mr. de Narp under the deferred compensation plan corresponding to Fiscal 2012 will be made in calendar year 2012 and such contribution will be reflected in the Corporation’s Fiscal 2013 Summary Compensation Table.

Termination and Change in Control Benefits

The Corporation has executive employment agreements with Robert A. Gannicott, Cyrille Baudet, Frederic de Narp, James R.W. Pounds, and Raymond N. Simpson. The Corporation also had an executive employment agreement with Alan Mayne. 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 following table sets out five scenarios of termination and explains the compensation that would be paid to the Named Executive Officers in event of such termination:

Compensation Element	Resignation(1)	Termination with Cause	Termination Without Cause(2)	Retirement	Change in Control
Base Salary	Ends immediately	Ends immediately	As negotiated, paid in lump sum, generally within 5 business days of termination	Ends immediately	As negotiated

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Compensation Element	Resignation(1)	Termination with Cause	Termination Without Cause(2)	Retirement	Change in Control
Annual Incentives (Bonus)	Entitled to unpaid Bonus	Forfeited	As negotiated, paid in lump sum, generally within 5 business days of termination	Entitled to unpaid Bonus	As negotiated
Long Term Incentives Stock Options	Unvested options cancelled, vested options expire in 60 days	Unvested options cancelled, vested options expire in 60 days	Unvested options cancelled, vested options expire in 60 days	Unvested options cancelled, vested options expire in 60 days	Options become fully vested
Long Term Incentives RSUs	Receive the value of vested RSUs, unvested RSUs cancelled	Receive the value of vested RSUs, unvested RSUs cancelled	Receive the value of vested RSUs, unvested RSUs cancelled	Receive the value of vested RSUs, unvested RSUs cancelled	Unvested RSUs which would have vested within one year of a Change in Control will vest immediately, balance continue to vest and be payable in accordance with Plan.
Long Term Incentives LTI Awards	Forfeit all rights to unvested LTI Awards, unless otherwise determined by the Committee in its sole discretion. Any Vested LTI Award Amount will continue to be governed by Plan.	Forfeit all rights to unvested LTI Awards, unless otherwise determined by the Committee in its sole discretion. Any Vested LTI Award Amount will continue to be governed by Plan.	Forfeit all rights to unvested LTI Awards, unless otherwise determined by the Committee in its sole discretion. Any Vested LTI Award Amount will continue to be governed by Plan.	Forfeit all rights to unvested LTI Awards, unless otherwise determined by the Committee in its sole discretion. Any Vested LTI Award Amount will continue to be governed by Plan.	Any award which would have vested within one year of Change in Control will vest, balance continue to vest and be payable in accordance with Plan.
Benefits(3)	None	None	Coverage as negotiated	None	Coverage as negotiated

(1)

Frederic de Narp’s executive employment agreement provides that he can resign his employment for Good Reason (which is essentially events which would constitute constructive dismissal at common law) after 90 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. de Narp’s notice.

(2)

The following table sets out the amount to be paid to the Named Executive Officers upon termination or a triggering event:

Named Executive Officer	Type of Termination or Triggering Event	Payment
Robert A. Gannicott	Termination without just cause, or if he elects to terminate his agreement within six months of a Change in Control	(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.
Frederic de Narp	Termination without cause or for Good Reason	(a) a payment equal to two times his then current base salary; and (b) an amount equal to two times the greater of (i) his last year’s bonus, or (ii) the average of his bonuses for the last two fiscal periods
	Upon the purchase of all of the issued and outstanding shares of HWI by an arm's length third party	Entitled to 2.5% of the amount by which the value of the shares of HWI has increased from the commencement of his employment to the date of the sale.
Cyrille Baudet	Termination without just cause within six months of a Change in Control of the Corporation, or HWI and the Corporation does not offer him employment	Payment equal to 18 months of his then current annual salary
Alan Mayne(2A)	Termination without just cause	(a) A payment equal to two times his then current annual salary; and (b) an amount equal to two times the greater of: (i) his last year’s bonus; or (ii) the average of his bonuses for the last two fiscal periods.

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Named Executive Officer	Type of Termination or Triggering Event	Payment
James R. W. Pounds	Termination without just cause, or if he elects to terminate the agreement within six months of a Change in Control for Good Reason	(a) A payment equal to two times his then current annual salary; and (b) an amount equal to two times the greater of: (i) his last year’s bonus; or (ii) the average of his bonuses for the last two fiscal periods.
Raymond Simpson	Termination without just cause, or if he elects to terminate the agreement within six months of a Change in Control for Good Reason	(a) A payment equal to two times his then current annual salary; and (b) an amount equal to two times the greater of: (i) his last year’s bonus; or (ii) the average of his bonuses for the last two fiscal periods.

(2A)	Employment with the Corporation ended April 30, 2011. Payments made, or payable to Alan Mayne are set out in the Summary Compensation Table under “All Other Compensation” on page 40 of this Circular.
(3)	The executive employment agreements obligate the Corporation to pay for existing benefit plan coverage for certain period of time: Mr. Gannicott, 3 years; Messrs. Mayne, Pound and Simpson, 2 years and Mr. de Narp, 1 year.

The estimated additional payment to the Named Executive Officers in the case of termination under the above-noted scenarios, 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:

Named Executive Officer	Compensation Element	Resignation	Termination With Cause	Termination Without Cause	Retirement	Change in Control
Robert A. Gannicott(1)	Salary and Bonus	-	-	5,869,725	-	5,869,725
	Stock Options	3,297,966	-	3,297,966	3,297,966	3,297,966
	Total	3,297,966	-	9,167,691	3,297,966	9,167,691
Frederic de Narp(2)	Salary and Bonus	-	-	2,646,741	-	-
	LTI Awards	-	-	-	-	-
	Total	-	-	2,646,741	-	-
Cyrille Baudet	Salary and Bonus	-	-	525,000	-	525,000
	RSUs	-	-	-	-	35,082
	LTI Awards	-	-	-	-	40,596
	Total	-	-	525,000	-	600,678
James R. W. Pounds(1)	Salary and Bonus	-	-	1,599,145	-	1,599,145
	Stock Options	1,641,055	-	1,641,055	1,641,055	1,641,055
	RSUs	-	-	-	-	337,852
	Total	1,641,055	-	3,240,200	1,641,055	3,578,052
Raymond Simpson	Salary and Bonus	-	-	914,472	-	914,472
	Stock Options	1,173,315	-	1,173,315	1,173,315	1,173,315
	RSUs	-	-	-	-	83,366
	Total	1,173,315	-	2,087,787	1,173,315	2,171,153

(1)

Converted into United States dollars at the Year End Exchange Rate

(2)

Frederic de Narp is not entitled to an additional payment in the event of the change of control of the Corporation, however, in the event of the purchase of all of the issued and outstanding shares of HWI by an arm's length third party he would be entitled to payment of 2.5% of the amount by which the value of the shares of HWI has increased from the commencement of his employment to the date of the sale, less capital contributions by the Corporation to HWI, and his benefit derived from any other long term incentive plan.

Mr. Gannicott’s and Mr. Baudet’s executive employment agreements contain an indefinite non-disclosure provision. Mr. de Narp’s executive employment agreement contains an indefinite non-disclosure provision, a non-solicitation provision for 9 months and a non-compete provision for 6 months following termination. Mr. Pounds’ executive employment agreement contains an indefinite non-disclosure provision and a 12 month non-solicitation provision following termination of employment. The executive employment agreements for Mr. Mayne and Mr. Simpson each have non-disclosure, non-solicitation and non-competition provisions. The non-disclosure obligations continue so long as the information is confidential to the Corporation, the non-solicitation provision is for 12 months and the non-compete provision is for 6 months following termination of employment.

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Mr. Gannicott is not a member of a defined pension plan or a defined contribution plan, and no pension is payable to him upon retirement.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table provides information as of January 31, 2012, 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 currently 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	2,400,899	Cdn$14.21	2,439,271

If approved by shareholders, the 2012 Restricted Share Unit Plan will provide for the issuance of up to 110,000 Common Shares.

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. On June 4, 2009, the Board amended the Stock Option Plan, without the necessity of shareholder approval to clarify the “Option Term” upon disability, death and termination. On January 13, 2011, the Board amended the Stock Option Plan to delete reference to cashless exercises due to amendments to the tax treatment of employee stock options under the Income Tax Act (Canada).

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 (and upon the receipt of a grant of options, each an “Optionee”);
(b)	as of the date hereof, there are stock options outstanding in respect of an aggregate of 2,375,399 Common Shares, representing approximately 2.8% 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”), and 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 calendar 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 calendar 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 (as defined in the Stock Option Plan), shall not exceed 10% of the Outstanding Issue, at the time of such grant;

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(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;
(i)	options granted under the Stock Option Plan may, at the discretion of the Board or Human Resources & Compensation 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)	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;
(n)	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
(o)	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 current or former director or executive officer or employee of the Corporation or any of its subsidiaries, 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.

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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.

ADDITIONAL INFORMATION

Financial information relating to the Corporation is contained in its comparative annual financial statements and Management’s Discussion and Analysis of the results of operations for Fiscal 2012. Copies of this 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 of the results of operations for the Corporation for an annual or interim period, the Annual Information Form, and 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. 1 or by emailing investor@harrywinston.com or by viewing the Corporation’s web site. Throughout this Management Proxy Circular, references to documents and/or 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
June 6, 2012

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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 seven are considered to be unrelated and independent directors within the meaning of Canadian and United States 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, David Carey, Noel Harwerth, Daniel Jarvis, Jean-Marc Loubier 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 and J. Roger B. Phillimore, because of his previous consulting arrangement with the Corporation which terminated on January 31, 2010.
(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 May 15, 2012. No members of the Board served together on the boards of other public companies:

Name of Director	Other Directorships Held
Matthew W. Barrett	Goldman Sachs Bank USA
Micheline Bouchard	Telus Corporation and PSP Investments
David Carey	None
Robert A. Gannicott	None
Noel Harwerth	Royal & Sun Alliance Insurance, Logica Group, Chairman of Sumitomo Mitsubishi Banking Europe and Chairman of GE Capital Bank Europe
Daniel Jarvis	None
Jean-Marc Loubier	Trinity Ltd.
Laurent E. Mommeja	None
J. Roger B. Phillimore	Lonmin plc

(e) Each face to face scheduled meeting of the Board includes an executive session with only non-management directors present. At least once per year, the executive session consists only of the independent directors. The Lead Director, or in his absence another independent director, presides over all executive sessions. The Board held eight scheduled meetings and two unscheduled meetings during the last completed fiscal year. The independent directors held private sessions at five meetings during the last completed fiscal year.

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(f)

The Chairman of the Corporation, Robert A. Gannicott, is a non-independent director. Daniel Jarvis, 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 2, 2010. The principal responsibilities of the Lead Director include overseeing the Board processes so that it operates efficiently and effectively in carrying out its duties, acting as a liaison between the Board and management, and presiding over all executive sessions of the Board. The Corporation has written guidelines for the Lead Director. These guidelines are available on the Corporation's website. Interested parties may contact the Lead Director by mail addressed to Mr. Jarvis c/o Harry Winston Diamond Corporation, P.O. Box 4569, Station A, Toronto ON Canada M5W 4T9 or in accordance with the procedure set out in the Corporation’s Whistleblower Protection Policy which is 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 on page 21 of this Management Proxy Circular (see “Meetings Held and Attendance of Directors”).

Majority Voting Policy

Board policy requires 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.

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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 long-term 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

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. Site visits to the Diavik Diamond Mine are arranged for new directors.

Board meetings are scheduled at the Corporation’s watch factory in Geneva, the Diavik Diamond Mine site, and for key retail locations such as New York, Beverly Hills, Chicago, Bal Harbour and Paris.

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. The following is a list of the internal and external conferences, seminars, courses and site tours that our Board members attended during the year:

• Institute of Corporate Directors courses
• Updates and presentations from Meridian
• Site visits to selected Retail Salons and to the Toronto sorting facility

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 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

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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.

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, except one, serve, or have served, on a number of corporate boards, and all 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 Lead Director 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. Directors complete an evaluation form for each fiscal year which contains 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, individual director contribution and interaction, strategic planning opportunities, management effectiveness and the Board’s relationship with management. The responses are reviewed by the Lead Director and presented to the Board.

The Board and the Nominating & Corporate Governance Committee monitor the size of the Board to faciliate 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.

The Board has implemented a policy that if, during a director’s service on the Board, he or she: (a) joins or resigns from another public company’s board of directors; or (b) significantly changes his or her primary employment or occupation (any such event shall be referred to as a “Status Change”), that director shall immediately notify the Nominating & Corporate Governance Committee. The Nominating & Corporate Governance Committee should re-evaluate the appropriateness of the continuing membership of the director on the Board in light of the Status Change and recommend to the Board the appropriate action, if any, to be taken with respect to the director. If the Board concludes that the Status Change is significant and requires a resignation of the director, the director shall immediately tender his or her resignation from the Board.

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Compensation

Disclosure regarding Compensation set out in Article 7 of National Instrument 58-101F1 can be found on page 27 of this Management Proxy Circular (See “Compensation Governance”).

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. The Charter of each Committee requires that each member of the Committee be an independent director.

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.

The Board conducts an annual evaluation of the effectiveness of the Board as a whole, and the effectiveness and contribution of its committees and individual directors.

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 United States regulatory developments affecting corporate governance, accountability and disclosure.

52

EX-99.2

Exhibit 99.2

HARRY WINSTON DIAMOND CORPORATION
PROXY SOLICITED BY MANAGEMENT
AND THE BOARD OF DIRECTORS
Annual and Special Meeting of Shareholders on July 18, 2012

The undersigned shareholder of Harry Winston Diamond Corporation (the “Corporation”) hereby nominates, constitutes and appoints Robert A. Gannicott, or failing him, Daniel Jarvis, 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 and special meeting of shareholders of the Corporation to be held on the 18^th day of July, 2012 (the "Meeting") at The Prince of Wales Northern Heritage Centre, 4750 48th Street, Yellowknife, Northwest Territories, 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	[   ]	[   ]
David Carey	[   ]	[   ]
Robert A. Gannicott	[   ]	[   ]
Noel Harwerth	[   ]	[   ]
Daniel Jarvis	[   ]	[   ]
Jean-Marc Loubier	[   ]	[   ]
Laurent E. Mommeja	[   ]	[   ]
J. Roger B. Phillimore	[   ]	[   ]

2. For the re-appointment of KPMG LLP, Chartered Accountants, as auditors of the Corporation.

VOTE FOR        [   ] WITHHOLD VOTE            [   ]

3. In respect of the approval of the 2012 Restricted Share Unit Plan, the reservation of up to 110,000 Common Shares of the Corporation for issuance under such plan, and the initial grant of 101,449 Restricted Share Units to Frederic de Narp pursuant to such plan, all as described in the accompanying Management Proxy Circular.

VOTE FOR       [   ] VOTE AGAINST                 [   ]

This proxy revokes and supersedes all proxies of any earlier date.

DATED this day of , 2012.

Signature of Shareholder

Name of Shareholder (print)

-2-

The shares represented by this proxy will be voted or withheld from voting in accordance with the instructions given on any vote or ballot called at the Meeting and if the shareholder has specified a choice with respect to any matter to be acted upon, the shares will be voted accordingly. 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 or her judgment may determine.

A shareholder has the right to appoint a person to attend and act for him or her and on his or her 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, 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 to the Attention of the Proxy Department at P.O. Box 721, Agincourt, Ontario, Canada, M1S 0A1, or by fax to 1-866-781-3111 (toll free within North America) or 416-368-2502, or in person to 320 Bay Street, Basement Level (B1), Toronto, Ontario, Canada, M5H 4A6, no later than 5:00 p.m. (Toronto time) on July 16, 2012 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 AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY 18, 2012. THE ATTENTION OF SHAREHOLDERS IS DIRECTED TO THE MANAGEMENT PROXY CIRCULAR WHICH ACCOMPANIES THIS FORM OF PROXY.

EX-99.3

Exhibit 99.3

HARRY WINSTON DIAMOND CORPORATION

ANNUAL REQUEST FORM
TO REGISTERED SHAREHOLDERS

Annual Financial Statements

In accordance with securities regulations, Harry Winston Diamond Corporation (the “Corporation”) is required to deliver its Annual Report containing annual financial statements and accompanying management’s discussion and analysis (“MD&A”) to each registered shareholder unless such shareholder informs the Corporation that he or she does not want a copy of these documents.

If you do not wish to receive the Annual Report with your proxy package in the future, please complete, sign and date this form and return as set out below. Please note, your decision not to receive the Corporation’s Annual Report can be revoked at any time by contacting *Canadian Stock Transfer Company Inc., by mail or fax as noted below. If we do not hear from you an Annual Report will continue to be included in your proxy package.

[   ] I do not wish to receive Harry Winston Diamond Corporation’s Annual Report and related year-end financial documents by mail. I understand that my consent may be revoked or changed at any time by notifying Canadian Stock Transfer Company Inc. by mail or fax.

Interim Financial Statements

In accordance with National Instrument 51-102, shareholders may elect annually to have their names added to the Mailing List of the Corporation. If you wish to receive the interim financial statements and MD&A for the interim financial statements of the Corporation, you must complete, sign and date this form and return as set out below.

[   ]	I do wish to receive Harry Winston Diamond Corporation’s interim financial statements and MD&A Please put my name on your Mailing List for the Corporation and send me the Interim Financial Statements and Interim MD&A of the Corporation,
	[   ]	by mail; or
	[   ]	by electronic delivery. I have read the terms of this consent and I consent to the electronic delivery of documents on the foregoing terms.

Completion of Form

Completed forms should be returned to our transfer agent, CIBC Mellon Trust Company, by mail or fax to: CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc., P.O. Box 700, Station B, Montreal, Quebec, H3B 3K3, Fax: 1-888-249-6189.

Alternatively, if you wish to receive an e-mail containing a link to these and other reports when they are available to view on-line, please enroll on-line at www.canstockta.com/electronicdelivery or complete and return the Consent to Electronic Delivery of Documents form on the reverse side.

If you have any questions, please contact Canadian Stock Transfer Company Inc. toll-free at 1-800-387-0825 in North America or at 416-682-3860 in Toronto and outside North America.

DATED the                   day of                                  , 2012.

(First Name and Surname)	(Signature
(Address)	CUSIP: 41587B100

*NOTE: Canadian Stock Transfer Company acts as the Administrative Agent for CIBC Mellon Trust Company.

Consent to Electronic Delivery of Documents

1)            I consent, until my consent is revoked by me, to receiving all future shareholder communications of Harry Winston Diamond Corporation, (“Harry Winston”) to which I am entitled as a shareholder electronically rather than by mail. These documents may include: (a) Annual Report; (b) Interim Financial Statements; (c) Other shareholder communications

2)            I understand and agree that, after my consent has been given and Harry Winston has filed the documents with applicable securities regulatory bodies, Harry Winston or its agent will notify me that a document which I am entitled to receive electronically is available at Harry Winston website with a link to that specific page of the website containing the document. I agree that such notification will be sent to me at the e-mail address I have provided below.

3)            I acknowledge that access to the Internet, e-mail and the worldwide web are required for me to access a document electronically and I confirm that I have such access.

4)            I understand and agree that: (a) any e-mail notice or other notification will not contain a paper document; (b) any e-mail notice or other notification will contain Harry Winston web address (or a hyperlink) identifying where the documents to be delivered electronically are located; (c) by accessing Harry Winston website information which I will be provided under paragraph 2, I can access, view, download and print a paper document from my computer; (d) a document distributed electronically will be in Portable Document Format (PDF); and (e) Adobe® Acrobat® Reader® software is required to view a document in PDF format and a link to that software will be available at that page of the Harry Winston website containing the documents to be delivered electronically. (Adobe® Acrobat® Reader® is the registered trademark of Adobe Systems Incorporated.)

5)            I understand that I may request a paper copy of a document for which I have consented to electronic delivery to CIBC Mellon Trust Company at the telephone number, fax number, e-mail address or mailing address set forth in the left side of the page.

6)            I understand and agree that: (a) at any time and without giving me advance notice, Harry Winston may elect not to send me a document electronically, in which case a paper copy of the document will be mailed to me; and (b) if a document intended to be sent to me electronically is not available electronically, a paper copy of the document will be mailed to me.

7)            I understand that Harry Winston will maintain on its website any document sent to me electronically for not less than six months from the date of its posting on the website.

8)            If you consent to electronic delivery, please return this form by fax or mail to the address noted at the bottom of the page. You can also submit your request online by visiting the Canadian Stock Transfer Company Inc. website www.canstockta.com/electronicdelivery

9)            I understand that I may revoke or modify my consent and that I may change my e-mail address to which notices are to be delivered to me any time by notifying Canadian Stock Transfer Company Inc. by telephone: 1-800-387-0825, fax: 1-888-249-6189 email: www.canstockta.com/InvestorInquiry or mail: CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc. P.O. Box 700, Postal Station B, Montreal, QC, H3B 3K3. I understand that if I change my e-mail address or revoke or modify my consent, I must notify Canadian Stock Transfer Company Inc. Such change, revocation or modification must actually be received and acknowledged by Canadian Stock Transfer Company Inc. in order for it to be effective.

10)           I understand that I am not required to consent to electronic delivery. I am a registered shareholder of Harry Winston, I have read and understand the terms of this “Consent to Electronic Delivery of Documents” form and, on those terms, I consent to the electronic delivery of the documents I am entitled to receive as a registered owner of Harry Winston.

DATED the                               day of                                   , 2012.

(First Name and Surname)	(Signature
(Address)	(Email Address)

Please return this form by mail or fax to: CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc., P.O. Box 700, Station B, Montreal, Quebec, H3B 3K3, Fax: 1-888-249-6189.

EX-99.4

HARRY WINSTON DIAMOND CORPORATION
(the “Corporation”)

ANNUAL REQUEST FORM
TO BENEFICIAL SHAREHOLDERS

Financial Statements

In accordance with National Instrument 51-102, shareholders (including beneficial owners) may elect annually to have their names added to the 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, without charge, you must complete this form and forward it as set out below.

Please put my name on the 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	[_]

[_]	by mail; or
[_]	by electronic delivery. I have read the terms of the consent (set out on the reverse side of this Annual Request Form) and I consent to the electronic delivery of the documents indicated above on such terms.

Completion of Form

Completed forms should be returned to the Corporation’s transfer agent, CIBC Mellon Trust Company, by mail to CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc., P.O. Box 700, Station B, Montreal, Quebec, H3B 3K3, or by fax to 1-888-249-6189.

Alternatively, if you wish to receive an e-mail containing a link to these and other reports when they are available to view online, please enroll on-line at www.canstockta.com/electronicdelivery or complete and return the Consent to Electronic Delivery of Documents form on the reverse side.

If you have any questions, please contact Canadian Stock Transfer Company Inc. toll-free at 1-800-387-0825 in North America or at 416-682-3860 in Toronto and outside North America.

DATED the                         day of                                , 2012.
_________________________________________	_________________________________________
(First Name and Surname)	(Signature
_________________________________________
(Address)	CUSIP: 41587B100

*NOTE: Canadian Stock Transfer Company Inc. acts as the Administrative Agent for CIBC Mellon Trust Company.

Consent to Electronic Delivery of Documents

1)      I consent, until my consent is revoked by me (in the manner set out in paragraph 9 below), to receiving all future shareholder communications of Harry Winston Diamond Corporation (“Harry Winston”) to which I am entitled as a shareholder electronically rather than by mail. These documents may include: (a) Annual Report; (b) Interim Financial Statements and management’s discussion and analysis (the “MD&A) thereon; (c) Annual Financial Statements and MD&A thereon; and (d) other shareholder communications

2)      I understand and agree that, after my consent has been given and Harry Winston has filed the documents with applicable securities regulatory bodies, Harry Winston or its agent will notify me that a document which I am entitled to receive electronically is available at Harry Winston’s website with a link to that specific page of the website containing the document. I agree that such notification will be sent to me at the e-mail address I have provided below.

3)      I acknowledge that access to the Internet, e-mail and the worldwide web are required for me to access a document electronically and I confirm that I have such access.

4)      I understand and agree that: (a) any e-mail notice or other notification will not contain a paper document; (b) any e-mail notice or other notification will contain Harry Winston’s web address (or a hyperlink) identifying where the documents to be delivered electronically are located; (c) by accessing the web address or hyperlink which I will be provided under paragraph 2, I can access, view, download and print a paper copy of the applicable document from my computer; (d) a document distributed electronically will be in Portable Document Format (PDF); and (e) Adobe® Acrobat® Reader® software is required to view a document in PDF and a link to that software will be available at that page of the Harry Winston website containing the documents to be delivered electronically. (Adobe® Acrobat® Reader® is the registered trademark of Adobe Systems Incorporated.)

5)      I understand that I may request a paper copy of a document for which I have consented to electronic delivery at no cost by contacting CIBC Mellon Trust Company at the telephone number, fax number, e-mail address or mailing address set forth on the reverse side of the page.

6)      I understand and agree that: (a) at any time and without giving me advance notice, Harry Winston may elect not to send me a document electronically, in which case a paper copy of the document will be mailed to me; and (b) if a document intended to be sent to me electronically is not available electronically, a paper copy of the document will be mailed to me.

7)      I understand that Harry Winston will maintain on its website any document sent to me electronically for not less than six months from the date of its posting on the website.

8)    If you consent to electronic delivery, please return this form by fax or mail to the address noted at the bottom of the page. You can also submit your request online by visiting Canadian Stock Transfer Company Inc.’s website at www.canstockta.com/electronicdelivery.

9)     I understand that I may revoke or modify my consent and that I may change my e-mail address to which notices are to be delivered to me any time by notifying Canadian Stock Transfer Company Inc. by telephone: 1-800-387-0825, fax: 1-888-249-6189, email: www.canstockta.com/InvestorInquiry or mail: CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc. P.O. Box 700, Postal Station B, Montreal, QC, H3B 3K3. I understand that if I change my e-mail address or revoke or modify my consent, I must notify Canadian Stock Transfer Company Inc. Such change, revocation or modification must actually be received and acknowledged by Canadian Stock Transfer Company Inc. in order for it to be effective.

10)   I understand that I am not required to consent to electronic delivery. I am a beneficial shareholder of Harry Winston, I have read and understand the terms of this “Consent to Electronic Delivery of Documents” form and, on such terms, I consent to the electronic delivery of the documents I am entitled to receive as a beneficial owner of Harry Winston.

DATED the                            day of                                   , 2012.
_________________________________________	_________________________________________
(First Name and Surname)	(Signature)
_________________________________________	_________________________________________
(Address)	(Email Address)

Please return this form by mail or fax to: CIBC Mellon Trust Company, c/o Canadian Stock Transfer Company Inc., P.O. Box 700, Station B, Montreal, Quebec, H3B 3K3, Fax: 1-888-249-6189.

EX-99.5

Exhibit 99.5

HARRY WINSTON DIAMOND CORPORATION

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

The Company focuses on the two most profitable segments of the diamond industry, mining and retailing, 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 luxury brand 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
7	Management’s Discussion and Analysis
30	Management’s Responsibility for Financial Information
31	Independent Auditors’ Report of Registered Public Accounting Firm
32	Report of Independent Registered Public Accounting Firm
33	Consolidated Financial Statements
37	Notes to Consolidated Financial Statements
75	Diavik Diamond Mine Mineral Reserve and Mineral Resource Statement
76	Harry Winston Retail Salons and Licensed Salons
77	Harry Winston Diamond Sales Offices
77	Board of Directors and Senior Management
78	Shareholder Information

Harry Winston Diamond Corporation | 2012 Annual Report

FELLOW SHAREHOLDERS,

The performance of the diamond market generally, and our business in particular, has in large part reflected global economic developments. The early part of last year saw a strong surge in rough diamond prices as demand for diamond jewelry anticipated a strong and immediate US recovery supplemented by new demand from China and India. This drove our own rough prices up by approximately 50% on average between the beginning of the year and July when European debt issues and uncertain US recovery reversed the trend. In the second half of the year most, but not all, categories of rough diamonds surrendered about half of the gains made in the first half. The most resilient categories were those delivering small, high-quality stones used in the watch industry and the weakest were the lower quality diamonds, where competition from the new supply from the Marange area of Zimbabwe has had an impact. The average price for our own assortments of rough diamonds ended the year approximately 20% above the beginning of the year, and pricing and demand have now stabilized, with most categories showing modest price increases again. Although we would all prefer more stable conditions than we saw over the last year, this experience has given a view of the effect on prices of a supply-demand imbalance in the diamond market.

Our luxury brand business has shared the experience of other luxury brands with significant sales growth. Perhaps more important than the sales growth itself is that we continue to build the foundations of a strong bridal jewelry and timepiece business to deliver more predictable growth than can be expected from reliance only on high-end sales. Our Japanese business has been particularly effective in this transition despite the challenges of the tsunami tragedy early last year.

The Diavik Mine is still in the very early stages of transitioning from open pit to underground production. Ideas for improvements in mining efficiency, and their implementation, are almost a monthly occurrence. Changes to the mine plan will be the norm as improvements are tested and bedded in. We would expect to signal any changes in the yearly plan in our quarterly reports.

2 Harry Winston Diamond Corporation | 2012 Annual Report

An advanced prefeasibility review has been completed for the development of the A-21 open pit and now proceeds to a shortened final feasibility review. Although currently anticipated capital costs for this project are higher than earlier expected, we believe that they are realistic in the current environment. The A-21 pit will bring ore feed to keep the processing plant filled as the underground mine becomes deeper with extended haulage distances.

We have already seen the Oppenheimer family surrender their helmsmanship of the diamondbusiness with the sale of the family’s ownership of De Beers to Anglo American and the Government of Botswana. The industry owes them a debt of gratitude for expanding the horizon of diamonds as love tokens from the restricted market of royal families to their use in most of the developed world’s marriage ceremonies. This market expansion role is now ably accomplished by the luxury brands.

We now see the world’s two largest mining companies both seeking to divest their diamond businesses in the realization that they are not of the scale of their bulk commodity businesses. Diamonds as a product are too complex to be treated as a commodity. It is a business for specialists with expertise in diamond mining, processing and marketing or combinations of those elements. Harry Winston is one of those specialists.

We look forward to an interesting and productive year ahead in both segments of our business.

Robert A. Gannicott
Chairman & Chief Executive Officer

Harry Winston Diamond Corporation | 2012 Annual Report 3

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

FOURTH QUARTER RESULTS
Consolidated sales were $216.0 million for the fourth quarter compared to $215.4 million for the comparable quarter of the prior year, resulting in a 17% increase in gross margin to $86.2 million and an operating profit of $30.7 million, compared to an operating profit of $21.2 million in the comparable quarter of the prior year. Consolidated EBITDA was $58.2 million compared to $45.9 million in the comparable quarter of the prior year.

The mining segment recorded sales of $102.2 million, a 24% increase from $82.7 million in the comparable quarter of the prior year. The increase in sales resulted from a 14% increase in volume of carats sold and a 9% increase in achieved rough diamond prices. The mining segment recorded an operating profit of $27.4 million compared to an operating profit of $17.9 million in the comparable quarter of the prior year. EBITDA for the mining segment was $51.7 million compared to $38.5 million in the comparable quarter of the prior year.

The luxury brand segment recorded sales of $113.8 million, a decrease of 14% from sales of $132.7 million in the comparable quarter of the prior year (a decrease of 18% at constant exchange rates). Operating profit was $6.8 million for the quarter compared to $5.3 million in the comparable quarter of the prior year. EBITDA for the luxury brand segment was $9.9 million compared to $9.0 million in the comparable quarter of the prior year.

The Company recorded a consolidated net profit attributable to shareholders of $16.6 million or $0.20 per share for the quarter, compared to a net profit attributable to shareholders of $13.7 million or $0.16 per share in the fourth quarter of the prior year.

(1)	Fiscal 2010 results are reported under Canadian generally accepted accounting principles.
(2)	The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to International Financial Reporting Standards. The Company defines EBITDA as sales minus cost of sales and selling, general and administrative expenses, meaning it represents operating profit before depreciation and amortization.

Harry Winston Diamond Corporation | 2012 Annual Report 5

ANNUAL RESULTS
Consolidated sales were $702.0 million for the year compared to $624.0 million for the prior year, resulting in a 6% increase in gross margin to $250.1 million and an operating profit of $56.5 million, compared to an operating profit of $68.3 million in the prior year. Consolidated EBITDA was $148.2 million compared to $145.4 million in the prior year.

The mining segment recorded sales of $290.1 million, a 4% increase from $279.2 million in the prior year. The increase in sales resulted from a 29% increase in the Company’s achieved rough diamond price per carat. This was partially offset by a 19% decrease in volume of carats sold as the Company elected to hold inventory. The mining segment recorded an operating profit of $48.7 million compared to an operating profit of $62.3 million in the prior year. Excluding the $13.0 million non-cash charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, operating profit would have been $61.7 million. EBITDA for the mining segment was $127.5 million compared to $125.7 million in the prior year.

The luxury brand segment recorded sales of $411.9 million, an increase of 19% from sales of $344.8 million in the prior year (an increase of 12% at constant exchange rates). Operating profit was $19.4 million for the year compared to $14.9 million in the prior year. EBITDA for the luxury brand segment was $31.8 million compared to $27.2 million in the prior year.

The Company recorded a consolidated net profit attributable to shareholders of $25.5 million or $0.30 per share for the year, compared to a net profit attributable to shareholders of $41.5 million or $0.52 per share in the prior year. Excluding the $8.4 million after-tax charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, the Company would have recorded a net profit attributable to shareholders of $33.8 million or $0.40 per share for the period.

6 Harry Winston Diamond Corporation | 2012 Annual Report

Management’s Discussion and Analysis
PREPARED AS OF APRIL 4, 2012 (ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)

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

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

Certain information included in this MD&A may constitute forward-looking information within the meaning of Canadian and United States securities laws. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “foresee”, “appears”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, “objective”, “modeled” or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding plans, timelines and targets for construction, mining, development, production and exploration activities at the Diavik Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital expenditure requirements and the funding thereof, liquidity and working capital requirements and sources, estimated reserves and resources at, and production from, the Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for rough diamonds, expected diamond prices and expectations concerning the diamond industry and the demand for luxury goods, expected cost of sales and gross margin trends in the mining segment, targets for compound annual growth rates of sales and operating income in the luxury brand segment, plans for expansion of the luxury brand retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See “Risks and Uncertainties” on page 23 for material risk factors that could cause actual results to differ materially from the forward-looking information.

Forward-looking information is based on certain factors and assumptions regarding, among other things, mining, production, construction and exploration activities at the Diavik Diamond Mine, world and US economic conditions, and the worldwide demand for luxury goods. Specifically, in making statements regarding expected diamond prices and expectations concerning the diamond industry and expected sales trends and market conditions in the luxury brand segment, the Company has made assumptions regarding, among other things, the state of world and US economic conditions, worldwide diamond production levels, and demand for luxury goods. While the Company considers these assumptions to be reasonable based on the information currently available to it, they may prove to be incorrect. See “Risks and Uncertainties” on page 23.

Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include, among other things, the uncertain nature of mining activities, including risks associated with underground construction and mining operations, risks associated with joint venture operations, including risks associated with the inability to control the timing and scope of future capital expenditures, risks associated with the remote location of and harsh climate at the Diavik Diamond Mine site, risks resulting from the Eurozone financial crisis, risks associated with regulatory requirements, fluctuations in diamond prices and changes in US and world economic conditions, the risk of fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the risks relating to the Company’s expansion strategy and of competition in the luxury jewelry business as well as changes in demand for high-end luxury goods. Please see page 23 of 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 the Company’s operations.

Harry Winston Diamond Corporation | 2012 Annual Report 7

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

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

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

Market Commentary
The Diamond Market
In parallel with the 2011 global economic environment, rough diamond prices rose strongly in the first half of the fiscal year but partially weakened in the second half, primarily due to the ongoing European sovereign debt crisis. Additionally, a substantial increase in rough diamond supply from Zimbabwe market resulted in a build-up of rough diamond inventories, which exerted downward pressure on polished diamond prices during the third quarter. However, by year end resilient retail demand for diamond jewelry returned greater stability to the market and fiscal 2012 closed with prices significantly higher than at the start of the fiscal year.

The medium-term diamond supply demand imbalance looks ever more positive. In small high-quality diamonds that are primarily used in high-end watches, that supply demand imbalance is already noticeable, with prices of some categories more than doubling in the first nine months of last year and only coming off slightly when the overall market weakened towards the end of 2011.

The Luxury Jewelry and Timepiece Market
The luxury jewelry and timepiece market continued to perform very well during the year. Increased consumer demand for luxury products was supported by new, young wealthy consumers from emerging market economies. These consumers focus on purchasing unique, high-quality luxury products from global brands. Strong increases in tourism from China and other emerging markets in Asia, Latin America and Eastern Europe continued to fuel the growth in demand for luxury products in the US and European markets as well as in their local markets. The economic recovery in the US has strengthened, providing additional demand for luxury goods. Global brands are investing in expanding distribution networks to meet the increasing demand for luxury products.

8 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

Consolidated Financial Results
The following is a summary of the Company’s consolidated quarterly results for the eight quarters ended January 31, 2012 following the basis of presentation utilized in its IFRS and Canadian generally accepted accounting principles (“GAAP”) financial statements:

(expressed in thousands of United States dollars except per share amounts and where otherwise noted)
(quarterly results are unaudited)
																																CDN
	IFRS																															GAAP
		2012			2012			2012			2012			2011			2011			2011			2011			2012			2011			2010
		Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1			Total			Total			Total
Sales	$	216,017		$	119,716		$	222,378		$	143,932		$	215,358		$	140,877		$	153,728		$	114,000		$	702,043		$	623,963		$	412,901
Cost of sales		129,807			75,524			150,177			96,452			141,391			84,765			85,798			75,711			451,960			387,665			291,722
Gross margin		86,210			44,192			72,201			47,480			73,967			56,112			67,930			38,289			250,083			236,298			121,179
Gross margin (%)		39.9%			36.9%			32.5%			33.0%			34.3%			39.8%			44.2%			33.6%			35.6%			37.9%			29.3%
Selling, general and
administrative expenses		55,500			46,155			49,101			42,795			52,722			41,282			37,998			35,948			193,552			167,950			143,150
Operating profit (loss)		30,710			(1,963	)		23,100			4,685			21,245			14,830			29,932			2,341			56,531			68,348			(21,971	)
Finance expenses		(3,481	)		(4,040	)		(5,183	)		(3,983	)		(3,727	)		(3,835	)		(2,985	)		(2,880	)		(16,687	)		(13,427	)		(11,541	)
Exploration costs		(177	)		(600	)		(781	)		(212	)		(351	)		(212	)		(76	)		(27	)		(1,770	)		(666	)		–
Finance and other income		81			164			83			258			278			69			154			168			586			669			592
Insurance settlement		–			–			–			–			–			–			–			–			–			–			3.350
Dilution loss		–			–			–			–			–			–			–			–			–			–			(34,761	)
Foreign exchange gain (loss)		458			436			288			(177	)		1,392			135			1,043			(2,213	)		1,005			357			(31,493	)
Profit (loss) before income taxes		27,591			(6,003	)		17,507			571			18,837			10,987			28,068			(2,611	)		39,665			55,281			(95,824	)
Income tax expense (recovery)		11,001			(1,272	)		7,519			(3,027	)		5,137			(2,410	)		10,877			(5,524	)		14,222			8,080			(18,803	)
Net profit (loss)	$	16,590		$	(4,731	)	$	9,988		$	3,598		$	13,700		$	13,397		$	17,191		$	2,913		$	25,443		$	47,201		$	(77,021	)
Attributable to shareholders	$	16,602		$	(4,728	)	$	9,986		$	3,596		$	13,693		$	12,657		$	13,043		$	2,137		$	25,454		$	41,530		$	(73,176	)
Attributable to non-controlling interest		(12	)		(3	)		2			2			7			740			4,148			776			(11	)		5,671			(3,845	)
Basic earnings (loss) per share	$	0.20		$	(0.06	)	$	0.12		$	0.04		$	0.16		$	0.15		$	0.17		$	0.03		$	0.30		$	0.52		$	(0.99	)
Diluted earnings (loss) per share	$	0.19		$	(0.06	)	$	0.12		$	0.04		$	0.16		$	0.15		$	0.17		$	0.03		$	0.30		$	0.51		$	(0.99	)
Cash dividends declared per share	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00		$	0.00
Total assets (i)	$	1,631		$	1,651		$	1,665		$	1,666		$	1,604		$	1,584		$	1,596		$	1,522		$	1,631		$	1,604		$	1,495
Total long-term liabilities (i)	$	670		$	654		$	625		$	605		$	603		$	596		$	539		$	457		$	670		$	603		$	477
Operating profit (loss)	$	30,710		$	(1,963	)	$	23,100		$	4,685		$	21,245		$	14,830		$	29,932		$	2,341		$	56,531		$	68,348		$	(21,971	)
Depreciation and amortization (ii)		27,512			23,121			20,716			20,291			24,635			18,657			19,515			14,200			91,639			77,007			64,112
EBITDA (iii)	$	58,222		$	21,158		$	43,816		$	24,976		$	45,880		$	33,487		$	49,447		$	16,541		$	148,170		$	145,355		$	42,141

(i)	Total assets and total long-term liabilities are expressed in millions of United States dollars.
(ii)	Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(iii)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 22.
	The comparability of quarter-over-quarter results is impacted by seasonality for both the mining and luxury brand segments. Harry Winston Diamond Corporation expects that the quarterly results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of sales events conducted during the quarter, and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter. The quarterly results for the luxury brand segment are also seasonal, with generally higher sales during the fourth quarter due to the holiday season. See “Segmented Analysis” on page 13 for additional information.

Harry Winston Diamond Corporation | 2012 Annual Report 9

MANAGEMENT’S DISCUSSION AND ANALYSIS

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a fourth quarter consolidated net profit attributable to shareholders of $16.6 million or $0.20 per share compared to a net profit attributable to shareholders of $13.7 million or $0.16 per share in the fourth quarter of the prior year.

CONSOLIDATED SALES
Sales for the fourth quarter totalled $216.0 million, consisting of rough diamond sales of $102.2 million and luxury brand segment sales of $113.8 million. This compares to sales of $215.4 million in the comparable quarter of the prior year (rough diamond sales of $82.7 million and luxury brand segment sales of $132.7 million). The Company now reports sales based on the selling location. See “Segmented Analysis” on page 13 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s fourth quarter cost of sales was $129.8 million, for a gross margin of 39.9% compared to a cost of sales of $141.4 million and a gross margin of 34.3% for the comparable quarter of the prior year. The Company’s cost of sales includes costs associated with mining, rough diamond sorting and luxury brand sales 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 and marketing, rent and building related costs. The Company incurred SG&A expenses of $55.5 million for the fourth quarter compared to $52.7 million in the comparable quarter of the prior year.

Included in SG&A expenses for the fourth quarter was $2.1 million for the mining segment compared to $3.0 million for the comparable quarter of the prior year, $49.9 million for the luxury brand segment compared to $47.9 million for the comparable quarter of the prior year, and $3.5 million for the corporate segment compared to $1.8 million for the comparable quarter of the prior year. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. See “Segmented Analysis” on page 13 for additional information.

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $11.0 million during the fourth quarter, compared to a net income tax expense of $5.1 million in the comparable quarter of the prior year. The Company’s combined Canadian federal and provincial statutory tax rate for the quarter is 27.9% . There are a number of items that can significantly impact the Company’s effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate such as earnings in foreign jurisdictions, and changes in our view of whether deferred tax assets are probable of being realized. As a result, the Company’s recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the fourth quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $1.2 million on the revaluation of the Company’s Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $3.5 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company’s deferred income tax expense, and is not taxable for Canadian income tax purposes. During the fourth quarter, the Company also recognized a deferred income tax expense of $2.8 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $3.0 million recognized in the comparable quarter of the prior year. The recorded tax provision during the fourth quarter also included a net income tax recovery of $0.6 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollars. This compares to a net income tax recovery of $1.6 million recognized in the comparable period of the prior year.

10 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future cash taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.

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

CONSOLIDATED FINANCE EXPENSES
Finance expenses of $3.5 million were incurred during the fourth quarter compared to $3.7 million during the comparable quarter of the prior year.

CONSOLIDATED EXPLORATION COSTS
Exploration costs of $0.2 million were incurred during the fourth quarter compared to $0.4 million in the comparable quarter of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the quarter compared to $0.3 million in the comparable quarter of the prior year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.5 million was recognized during the quarter compared to a net foreign exchange gain of $1.4 million in the comparable quarter of the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.

Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded consolidated net profit attributable to shareholders of $25.5 million or $0.30 per share for the twelve months ended January 31, 2012, compared to a net profit attributable to shareholders of $41.5 million or $0.52 per share in the comparable period of the prior year. Excluding the $8.4 million after-tax charge for de-recognition of certain paste production assets in the mining segment incurred in the third quarter of fiscal 2012, the Company would have recorded a net profit attributable to shareholders of $33.8 million or $0.40 per share for the period.

CONSOLIDATED SALES
Sales for the twelve months ended January 31, 2012, totalled $702.0 million, consisting of rough diamond sales of $290.1 million and luxury brand segment sales of $411.9 million. This compares to sales of $624.0 million in the comparable period of the prior year (rough diamond sales of $279.2 million and luxury brand segment sales of $344.8 million). The Company now reports sales based on the selling location. See “Segmented Analysis” on page 13 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s cost of sales for the twelve months ended January 31, 2012, was $452.0 million, for a gross margin of 35.6% compared to a cost of sales of $387.7 million and a gross margin of 37.9% in the comparable period of the prior year. The Company’s cost of sales includes costs associated with mining, rough diamond sorting and luxury brand 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 and marketing, rent and building related costs. The Company incurred SG&A expenses of $193.6 million for the twelve months ended January 31, 2012, compared to $168.0 million in the comparable period of the prior year.

Included in SG&A expenses for the twelve months ended January 31, 2012, was $13.5 million for the mining segment compared to $11.5 million for the comparable period of the prior year, $168.6 million for the luxury brand segment compared to $147.9 million for the comparable period of the prior year, and $11.5 million for the corporate segment compared to $8.6 million for the comparable period of the prior year. The corporate segment captures costs not specifically related to operations of the mining or luxury brand segments. See “Segmented Analysis” on page 13 for additional information.

Harry Winston Diamond Corporation | 2012 Annual Report 11

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $14.2 million during the twelve months ended January 31, 2012, compared to a net income tax expense of $8.1 million in the comparable period of the prior year. The Company’s combined Canadian federal and provincial statutory tax rate for the period is 27.9% . There are a number of items that can significantly impact the Company’s effective tax rate, including foreign currency exchange rate fluctuations, the Northwest Territories mining royalty, earnings subject to tax different than the statutory rate, such as earnings in foreign jurisdictions and changes in our view of whether deferred tax assets are probable of being realized. As a result, the Company’s recorded tax provision can be significantly different than the expected tax provision calculated based on the statutory tax rate.

The recorded tax provision is particularly impacted by foreign currency exchange rate fluctuations. The Company’s functional and reporting currency is US dollars; however, the calculation of income tax expense is based on income in the currency of the country of origin. As such, the Company is continually subject to foreign exchange fluctuations, particularly as the Canadian dollar moves against the US dollar. During the twelve months ended January 31, 2012, the Company recorded an unrealized foreign exchange loss of $0.5 million on the revaluation of the Company’s Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $12.5 million in the comparable period of the prior year. The unrealized foreign exchange loss is recorded as part of the Company’s deferred income tax recovery, and is not deductible for Canadian income tax purposes. During the twelve months ended January 31, 2012, the Company also recognized a deferred income tax expense of $5.6 million for temporary differences arising from the difference between the historical exchange rate and the current exchange rate on translation of foreign currency non-monetary items. This compares to a deferred income tax recovery of $17.6 million recognized in the comparable period of the prior year. The recorded tax provision during the twelve months ended January 31, 2012 also included a net income tax recovery of $4.4 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollars. This compares to a net income tax recovery of $4.7 million recognized in the comparable period of the prior year.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future cash taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2032.

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

CONSOLIDATED FINANCE EXPENSES
Finance expenses of $16.7 million were incurred during the twelve months ended January 31, 2012, compared to $13.4 million during the comparable period of the prior year. Finance expenses were impacted by increased debt levels in the mining segment related to the $60.0 million outstanding on the Standard Chartered Bank credit facility during the year and the $70.0 million promissory note payable to Kinross Gold Corporation (“Kinross”) issued on August 25, 2010, which was repaid on August 25, 2011.

CONSOLIDATED EXPLORATION COSTS
Exploration costs of $1.8 million were incurred during the twelve months ended January 31, 2012, compared to $0.7 million in the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.6 million was recorded during the twelve months ended January 31, 2012, compared to $0.7 million in the prior year.

CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $1.0 million was recognized during the twelve months ended January 31, 2012, compared to a net foreign exchange gain of $0.4 million in the prior year. The Company does not currently have any significant foreign exchange derivative instruments outstanding.

12 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

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

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																					CDN GAAP
		2012		2012			2012		2012		2011		2011		2011		2011		2012		2011		2010
		Q4		Q3			Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Sales
North America	$	2,727	$	8,835		$	447	$	3,009	$	2,689	$	2,560	$	1,128	$	4,040	$	15,018	$	10,418	$	7,310
Europe		78,846		21,993			80,131		50,752		75,715		50,353		81,462		40,146		231,722		247,677		148,364
Asia		20,659		5,411			9,030		8,274		4,291		7,795		4,237		4,736		43,374		21,059		32,211
Total sales		102,232		36,239			89,608		62,035		82,697		60,708		86,827		48,922		290,114		279,154		187,885
Cost of sales		72,783		34,112			67,613		53,443		61,822		45,039		54,408		44,143		227,951		205,412		174,651
Gross margin		29,449		2,127			21,995		8,592		20,875		15,669		32,419		4,779		62,163		73,742		13,234
Gross margin (%)		28.8%		5.9%			24.5%		13.9%		25.2%		25.8%		37.3%		9.8%		21.4%		26.4%		7.0%
Selling, general and administrative expenses		2,061		3,274			3,489		4,630		3,017		3,031		2,872		2,558		13,454		11,478		19,502
Operating profit (loss)	$	27,388	$	(1,147	)	$	18,506	$	3,962	$	17,858	$	12,638	$	29,547	$	2,221	$	48,709	$	62,264	$	(6,268	)
Depreciation and amortization (i)		24,284		19,932			17,461		17,083		20,669		15,428		16,352		10,975		78,760		63,424		51,154
EBITDA (ii)	$	51,672	$	18,785		$	35,967	$	21,045	$	38,527	$	28,066	$	45,899	$	13,196	$	127,469	$	125,688	$	44,886

(i)	Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(ii)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 22.

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
MINING SALES
During the quarter, the Company sold 0.86 million carats for a total of $102.2 million for an average price per carat of $120 compared to 0.75 million carats for a total of $82.7 million for an average price per carat of $110 in the comparable quarter of the prior year. The increase in sales resulted from a 14% increase in volume of carats sold and a 9% increase in the Company’s achieved rough diamond price per carat. The increase in the carats sold was primarily the result of the sale of a portion of the lower priced goods held back by the Company at October 31, 2011 due to an oversupply in the market.

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

MINING COST OF SALES AND GROSS MARGIN
The Company’s fourth quarter cost of sales was $72.8 million, resulting in a gross margin of 28.8% compared to a cost of sales of $61.8 million and a gross margin of 25.2% in the comparable quarter of the prior year. Cost of sales included $24.3 million of depreciation and amortization compared to $20.7 million in the comparable quarter of the prior year. The mining gross margin is anticipated to fluctuate between quarters, resulting from variations in the specific mix of product sold during each quarter and rough diamond prices.

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

MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $1.0 million from the comparable quarter of the prior year primarily due to a decrease in professional fees.

Harry Winston Diamond Corporation | 2012 Annual Report 13

MANAGEMENT’S DISCUSSION AND ANALYSIS

Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
MINING SALES
During the twelve months ended January 31, 2012, the Company sold 2.1 million carats for a total of $290.1 million for an average price per carat of $137 compared to 2.6 million carats for a total of $279.2 million for an average price per carat of $106 in the prior year. The increase in sales resulted from a 29% increase in the Company’s achieved rough diamond price per carat. This was partially offset by a 19% decrease in volume of carats sold as the Company elected to hold inventory.

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

MINING COST OF SALES AND GROSS MARGIN
The Company’s cost of sales for the twelve months ended January 31, 2012, was $228.0 million, resulting in a gross margin of 21.4% compared to a cost of sales of $205.4 million and a gross margin of 26.4% in the prior year. Cost of sales included $78.8 million of depreciation and amortization compared to $63.4 million in the prior year. Included in the cost of sales for the fiscal year was a non-cash $13.0 million charge ($8.4 million after-tax) related to the de-recognition of certain components of the backfill plant (the “Paste Plant”) associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly were de-recognized during the third quarter. Excluding this charge, cost of sales would have been $215.0 million (gross margin of 25.9%), a 5% increase from the prior year. This increase was the result of higher volume of production during the fiscal year from the higher cost underground mine offset by a 19% decrease in volume of carats sold. 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 the Company’s cost of handling and sorting product in preparation for sales to third parties, and amortization and depreciation, the majority of which is recorded using the unit-of-production method over estimated proven and probable reserves.

MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment increased by $2.0 million from the prior year due to stock-based compensation and executive severance costs.

MINING SEGMENT OPERATIONAL UPDATE
Production for calendar year 2011 at the Diavik Diamond Mine was 6.7 million carats consisting of 5.4 million carats produced from 1.80 million tonnes of ore from the A-418 kimberlite pipe, 0.7 million carats produced from 0.36 million tonnes of ore from the A-154 North kimberlite pipe, and 0.4 million carats produced from 0.10 million tonnes of ore from the A-154 South kimberlite pipe. Also included in production for the calendar year was an estimated 0.2 million carats from reprocessed plant rejects (“RPR”). These RPR are not included in the Company’s reserves and resource statement and are therefore incremental to production. Rough diamond production was 3% higher than the prior calendar year due primarily to an increase in ore processed.

Ore production for the fourth calendar quarter consisted of 0.1 million carats produced from 0.04 million tonnes of ore from the A-154 South kimberlite pipe, 0.2 million carats produced from 0.10 million tonnes of ore from the A-154 North kimberlite pipe and 1.2 million carats produced from 0.42 million tonnes of ore from the A-418 kimberlite pipe. Also included in production for the calendar quarter was an estimated 0.05 million carats from RPR. Average grade increased to 2.9 carats per tonne in the fourth calendar quarter from 2.8 carats per tonne in the comparable quarter of the prior year. The increase in average grade was the result of the production of RPR in the current calendar quarter.

14 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

HARRY WINSTON DIAMOND LIMITED PARTNERSHIP’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,
	2011	2010	2011	2010
Diamonds recovered (000s carats)	641	617	2,670	2,599
Grade (carats/tonne)	2.88	2.77	2.99	3.15

Mining Segment Outlook
PRODUCTION
A mine plan and budget for calendar 2012 has been approved by Rio Tinto plc, the operator of the Diavik Diamond Mine, and the Company. The plan for calendar 2012 foresees Diavik Diamond Mine production of approximately 8.3 million carats from the mining of 2.0 million tonnes of ore and processing of 2.2 million tonnes of ore. Open pit mining of approximately 1.0 million tonnes is expected to be exclusively from A-418. Underground mining of approximately 1.0 million tonnes is expected to be sourced equally from the A-154 South and A-154 North kimberlite pipes. Included in the estimated production for calendar 2012 is approximately 1.0 million carats from RPR and 0.1 million carats from the implementation of an improved recovery process for small diamonds. These RPR and small diamond recoveries are not included in the Company’s reserves and resource statement and are therefore incremental to production.

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

PRICING
The rough diamond market experienced a modest improvement in prices during the fourth quarter of fiscal 2012 from the market deterioration in the third quarter. Based on prices from the Company’s last complete rough diamond sale in February 2012 and the current diamond recovery profile of the Diavik processing plant, the Company has modeled the approximate rough diamond price per carat for each of the Diavik ore types in the table that follows.

		February 2012
		average price per
		carat
Ore type		(in US dollars)
A-154 South	$	160
A-154 North		205
A-418 A Type Ore		145
A-418 B Type Ore		100
RPR		55

COST OF SALES AND CASH COST OF PRODUCTION
The Company expects cost of sales in fiscal 2013 to be approximately $330 million. Included in this amount is depreciation and amortization of approximately $110 million at an assumed average Canadian/US dollar exchange rate of $1.00. The increase over fiscal 2012 is due to a combination of an increase in the proportion of underground ore mined, which is more costly to produce, and the expected sale during fiscal 2013 of the remaining lower priced goods previously held back in inventory by the Company. At January 31, 2012, the Company had 0.8 million carats of rough diamond inventory available for sale with an estimated current market value of approximately $80 million. Of these, approximately 65% were goods held back by the Company at October 31, 2011 due to an oversupply in the market.

The Company’s share of the cash cost of production at the Diavik Diamond Mine for calendar 2012 is expected to be $173 million at an assumed average Canadian/US dollar exchange rate of $1.00. This compares to cash cost of production of $168 million for calendar 2011 at an actual average Canadian/US dollar exchange rate of $1.00.

Harry Winston Diamond Corporation | 2012 Annual Report 15

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

(expressed in thousands of United States dollars)		2012
Diavik cash cost of production	$	167,787
Private royalty		5,535
Other cash costs		4,009
Total cash cost of production		177,331
Depreciation and amortization		88,302
Total cost of production		265,633
Adjusted for stock movements		(37,682	)
Total cost of sales	$	227,951

CAPITAL EXPENDITURES
During fiscal 2012 and the fourth quarter, HWDLP’s 40% share of capital expenditures at the Diavik Diamond Mine was approximately $42.6 million and $12.2 million, respectively. During fiscal 2013, HWDLP’s 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $78 million at an assumed average Canadian/US dollar exchange rate of $1.00.

EXPLORATION
The Company has additionally staked 226,000 acres of mineral claims on the prospective geological trend to the southwest of the existing mine site and is starting a small but important basal till drilling program to assess the potential for new diamondiferous kimberlite pipes over the coming years. On September 6, 2011, the Company announced that Harry Winston Diamond Mines Ltd. and its wholly owned subsidiary, 6355137 Canada Inc., entered into an option agreement with North Arrow Minerals Inc. (“North Arrow”) and Springbok Holdings Inc., (“Springbok”) in regards to their Lac de Gras properties in the Northwest Territories. Under the terms of the agreement, the two properties collectively will form a “Joint Venture Property”. In order for the option to vest, the Company is to carry out exploration on the Joint Venture Property, making expenditures of at least $5 million over a five-year period. Upon vesting, a joint venture will be formed, in which the Company will hold a 55% interest, and in which North Arrow and Springbok will equally share a 45% interest, in the entire Joint Venture Property.

16 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																				CDN GAAP
		2012		2012		2012		2012		2011		2011		2011		2011		2012		2011		2010
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Sales
North America	$	41,537	$	28,817	$	27,183	$	35,487	$	46,489	$	20,977	$	19,456	$	21,578	$	133,024	$	108,500	$	72,764
Europe		31,204		19,561		26,098		17,446		15,701		27,155		20,327		15,441		94,309		78,624		52,339
Asia (excluding Japan)		17,272		13,133		59,056		14,354		50,817		16,671		10,858		14,158		103,815		92,504		45,601
Japan		23,772		21,966		20,433		14,610		19,654		15,366		16,260		13,901		80,781		65,181		54,312
Total sales		113,785		83,477		132,770		81,897		132,661		80,169		66,901		65,078		411,929		344,809		225,016
Cost of sales		57,024		41,378		82,513		42,958		79,518		39,675		31,339		31,517		223,873		182,049		117,071
Gross margin		56,761		42,099		50,257		38,939		53,143		40,494		35,562		33,561		188,056		162,760		107,945
Gross margin (%)		49.9%		50.4%		37.9%		47.5%		40.1%		50.5%		53.2%		51.6%		45.7%		47.2%		48.0%
Selling, general and administrative expenses		49,929		40,635		43,331		34,716		47,866		34,942		33,081		31,967		168,611		147,856		123,648
Operating profit (loss)	$	6,832	$	1,464	$	6,926	$	4,223	$	5,277	$	5,552	$	2,481	$	1,594	$	19,445	$	14,904	$	(15,703	)
Depreciation and amortization (i)		3,089		3,048		3,115		3,069		3,688		2,882		2,816		2,878		12,321		12,264		12,958
EBITDA (ii)	$	9,921	$	4,512	$	10,041	$	7,292	$	8,965	$	8,434	$	5,297	$	4,472	$	31,766	$	27,168	$	(2,745	)

(i)	Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(ii)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 22.

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
LUXURY BRAND SALES
Sales for the fourth quarter were $113.8 million compared to $132.7 million for the comparable quarter of the prior year, a decrease of 14% (a decrease of 18% at constant exchange rates). North American sales decreased 11% to $41.5 million, European sales increased 99% to $31.2 million, sales in Asia (excluding Japan) decreased 66% to $17.3 million and sales in Japan increased 21% to $23.8 million. The fourth quarter of the prior year included a significant sale in Asia (excluding Japan) that was not repeated in the current fourth quarter. During the quarter there were $6.7 million of high-value transactions, which carry generally lower-than-average gross margins, compared with $48.0 million in the comparable period of the prior year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the fourth quarter was $57.0 million compared to $79.5 million for the comparable quarter of the prior year. Gross margin for the quarter was $56.8 million or 49.9% compared to $53.1 million or 40.1% for the fourth quarter of the prior year. The improvement in gross margin was primarily due to product mix and several high-value transactions in the prior year totalling $48.0 million that generated lower-than-average gross margins.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 4% to $49.9 million from $47.9 million in the comparable quarter of the prior year. The increase was due primarily to higher advertising, marketing and selling expenses and increased rent and building related expenses. Fixed costs accounted for $1.9 million of the increase, while variable expenses linked to higher volume of sales accounted for $0.2 million of the increase. SG&A expenses included depreciation and amortization expense of $3.0 million compared to $3.6 million in the comparable quarter of the prior year.

Harry Winston Diamond Corporation | 2012 Annual Report 17

MANAGEMENT’S DISCUSSION AND ANALYSIS

Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
LUXURY BRAND SALES
Sales for the twelve months ended January 31, 2012, were $411.9 million compared to $344.8 million for the prior year, an increase of 19% (12% at constant exchange rates). North American sales increased 23% to $133.0 million, European sales increased 20% to $94.3 million, sales in Asia (excluding Japan) increased 12% to $103.8 million and sales in Japan increased 24% to $80.8 million. During the period there were $67.5 million of high-value transactions, which carry generally lower-than-average gross margins, compared to $54.0 million in the prior year.

LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the twelve months ended January 31, 2012, was $223.9 million compared to $182.1 million for the prior year. Gross margin for the twelve months ended January 31, 2012, was $188.1 million or 45.7% compared to $162.8 million or 47.2% for the prior year. The decrease in gross margin resulted primarily from development costs related to the launch of two new watch collections during the year.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 14% to $168.6 million from $147.9 million in the prior year. The increase was due primarily to higher advertising, marketing and selling expenses, higher variable compensation expenses resulting from higher sales and increased rent and building related expenses. Fixed costs accounted for $16.9 million of the increase, while variable expenses linked to higher volume of sales accounted for $3.8 million of the increase. SG&A expenses included depreciation and amortization expense of $12.1 million compared to $11.9 million in the prior year.

LUXURY BRAND SEGMENT OPERATIONAL UPDATE
During the fiscal year ended January 31, 2012, the luxury brand segment generated sales of $411.9 million, an increase of 19% over the prior year at actual exchange rates and a 12% increase at constant exchange rates. The Company recorded high-value transactions of $67.5 million during the twelve-month period compared with $54.0 million in the prior year. The North American market generated sales of $133.0 million, an increase of 23% over the prior year. The long-term trend of growing wealth in Asia has resulted in increased mobility of luxury consumers, benefiting the North American market. In Japan, sales of $80.8 million increased by 24% at actual exchange rates and by 13% on a constant exchange rate basis over the prior year. Asia (excluding Japan) had sales of $103.8 million, representing an increase of 12% at actual exchange rates and 5% on a constant exchange rate basis over the prior year. In Europe, sales of $94.3 million were 20% higher at actual exchange rates and 8% higher on a constant exchange rate basis over the prior year.

Two new licensed Harry Winston salons were opened during the fiscal year: in the Emirates Towers and in the Dubai Mall, in Dubai, United Arab Emirates. During January 2012, a new Harry Winston directly operated salon was opened in Shanghai, China.

The luxury brand segment’s distribution network consists of 20 directly operated salons, four licensed salons (in Manila, Philippines, Kiev, Ukraine and two in Dubai, United Arab Emirates) and 194 wholesale watch doors around the world.

Luxury Brand Segment Outlook
With the long-term trend of increasing global demand for luxury products, the Company is optimistic that fiscal 2013 will represent a strong opportunity to grow sales and profitability. The influx of new young wealthy consumers from emerging markets is expected to continue to drive demand for luxury products in the US and Europe as well as in local markets. Luxury brands with strong global distribution networks are well positioned to benefit from the increased mobility of wealthy consumers. The Company will continue to focus on expanding its distribution network, especially in emerging markets such as China, Russia and the Middle East, where consumer demand for luxury products is growing rapidly. The strength of the Harry Winston brand, the introduction of new jewelry and watch products, supported by innovative advertising campaigns and promotional events, will allow the Company to continue to build global brand awareness.

18 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

In fiscal 2013, a new directly operated flagship salon in Shanghai, China, is expected to be opened during the first quarter, and a second directly operated salon in London, United Kingdom, in mid-year. Also during the fiscal year, two new licensed salons are expected to be opened in Moscow, Russia, and Kuwait City, Kuwait. The Company also plans to expand by 30 wholesale watch doors to more than 220 doors by the end of fiscal 2013. A key component of the luxury brand segment’s growth strategy is the expansion of its salon network and wholesale distribution network. The growth target is to expand to approximately 35 directly operated salons, 15 licensed salons and 300 wholesale doors by fiscal 2016. Management’s long-term financial objectives to fiscal 2016 include compound annual revenue growth in the mid-teens, a gross margin target in the low 50% range, and an operating profit margin target in the low to mid-teens.

On May 19, 2011, the Company announced that Harry Winston Inc. had entered into a business arrangement with Diamond Asset Advisors AG (“DAA”), which is in the process of establishing a polished diamond investment fund (the “Fund”). The Fund will be structured as a limited partnership with total funding of up to $250 million, offering institutional investors direct exposure to the wholesale market price of polished diamonds. Under the terms of the arrangement with the Fund, the Company’s expert diamond team will source diamonds for the Fund that have the same high-quality characteristics that the luxury brand segment uses in its jewelry and watches, with a portion of the diamonds coming from the Company’s existing inventory. The Fund will purchase the diamonds and then consign them to Harry Winston Inc., which will act as custodian. Harry Winston Inc. will use the consigned polished diamonds in the manufacturing of its jewelry and watches, paying the Fund when the jewelry or watch is sold. The price paid by the Fund to replace the sold polished diamonds will be used to determine the Fund’s market value. This arrangement will increase the inventory available to Harry Winston Inc.’s expanding international salon network without additional demands on working capital. The Fund is expected to raise the first capital subscription of approximately $100 million from investors in fiscal 2013, with the remaining $150 million expected to be raised over the following year, subject to market conditions.

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

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																														CDN GAAP
		2012			2012			2012			2012			2011			2011			2011			2011			2012			2011			2010
		Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1			Total			Total			Total
Sales	$	–		$	–		$	–		$	–		$	–		$	–		$	–		$	–		$	–		$	–		$	–
Cost of sales		–			34			51			51			51			51			51			51			136			204			–
Gross margin		–			(34	)		(51	)		(51	)		(51	)		(51	)		(51	)		(51	)		(136	)		(204	)		–
Gross margin (%)		–%			–%			–%			–%			–%			–%			–%			–%			–%			–%			–%
Selling, general and administrative expenses		3,510			2,246			2,281			3,449			1,839			3,309			2,045			1,423			11,487			8,616			–
Operating profit (loss)	$	(3,510	)		(2,280	)		(2,332	)		(3,500	)		(1,890	)		(3,360	)		(2,096	)		(1,474	)		(11,623	)		(8,820	)	$	–
Depreciation and amortization (i)		139			141			140			139			278			347			347			347			558			1,319			–
EBITDA (ii)	$	(3,371	)	$	(2,139	)	$	(2,192	)	$	(3,361	)	$	(1,612	)	$	(3,013	)	$	(1,749	)	$	(1,127	)	$	(11,065	)	$	(7,501	)	$	–

(i)	Depreciation and amortization included in cost of sales and selling, general and administrative expenses.
(ii)	Earnings before interest, taxes, depreciation and amortization (“EBITDA”). See “Non-GAAP Measure” on page 22.

Three Months Ended January 31, 2012 Compared to Three Months Ended January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $1.7 million from the comparable quarter of the prior year primarily due to travel expenses and salaries and benefits related to additional corporate employees.

Twelve Months Ended January 31, 2012 Compared to Twelve Months Ended January 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.9 million from the prior year primarily due to stock-based compensation, and travel expenses and salaries and benefits related to additional corporate employees.

Harry Winston Diamond Corporation | 2012 Annual Report 19

MANAGEMENT’S DISCUSSION AND ANALYSIS

Liquidity and Capital Resources
Working Capital
As at January 31, 2012, the Company had unrestricted cash and cash equivalents of $78.1 million compared to $108.7 million at January 31, 2011. The Company had cash on hand and balances with banks of $76.0 million and short-term investments of $2.1 million at January 31, 2012. During the year ended January 31, 2012, the Company reported cash from operations of $59.0 million compared to $74.0 million in the prior year. At January 31, 2012, the Company had 0.8 million carats of rough diamond inventory available for sale at an estimated current market value of approximately $80 million.

Working capital increased to $439.0 million at January 31, 2012, from $331.3 million at January 31, 2011. During the year, the Company increased accounts receivable by $4.3 million, increased inventory and supplies by $42.0 million, increased other current assets by $4.2 million, decreased trade and other payables by $31.2 million and increased employee benefit plans by $2.1 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, the seasonality of mine operating expenses, capital expenditure programs, the number of rough diamond sales events conducted during the quarter and the volume, size and quality distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each quarter, along with the seasonality of sales and salon expansion in the luxury brand segment. The Company’s principal working capital needs include investments in inventory, other current assets, trade and other payables, and income taxes payable.

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

Financing Activities
The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. At January 31, 2012, $50.0 million was outstanding compared to $50.0 million at January 31, 2011.

During the year, the Company paid the $70.0 million promissory note plus accrued interest owing to Kinross from cash on hand. The promissory note was issued to Kinross on August 25, 2010, as part of the consideration for reacquiring Kinross’s 9% indirect interest in the Diavik Joint Venture.

As at January 31, 2012, $nil and $4.3 million was outstanding under the Company’s revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively, compared to $nil at January 31, 2011.

During the year ended January 31, 2012, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $200.5 million from $165.0 million at January 31, 2011.

Investing Activities
During the fiscal year, the Company purchased property, plant and equipment of $64.9 million, of which $45.2 million was purchased for the mining segment and $19.7 million for the luxury brand segment.

Contractual Obligations
The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the Joint Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally, at the Joint Venture level, contractual obligations exist with respect to operating purchase obligations, as administered by DDMI, the operator of the mine. In order to maintain its 40% ownership interest in the Diavik Diamond Mine, HWDLP is obligated to fund 40% of the Joint Venture’s total expenditures on a monthly basis. HWDLP’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 2012 to 2016, is approximately $140 million, assuming a Canadian/US average exchange rate of $1.00 for the five years. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:

20 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONTRACTUAL OBLIGATIONS				Less than		Year		Year		After
(expressed in thousands of United States dollars)		Total		1 year		2–3		4–5		5 years
Interest-bearing loans and borrowings (a)(b)	$	321,751	$	39,578	$	260,954	$	4,852	$	16,367
Environmental and participation agreements incremental commitments (c)		93,330		82,676		4,844		–		5,810
Operating lease obligations (d)		220,352		22,439		39,288		35,997		122,628
Total contractual obligations	$	635,433	$	144,693	$	305,086	$	40,849	$	144,805

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

	The Company has available a $45.0 million revolving financing facility (utilization in either US dollars or Euros) for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited. Borrowings under the Belgian facility bear interest at the bank’s base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.0%. At January 31, 2012, $nil and $4.3 million were outstanding under this facility relating to its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited, respectively. The facility is guaranteed by Harry Winston Diamond Corporation.
	Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility, which expires on March 31, 2013. There are no scheduled repayments required before maturity. At January 31, 2012, $200.5 million had been drawn against this secured credit facility.
	Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for CHF 17.5 million ($18.9 million) used to finance the construction of the Company’s watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($3.8 million) loan and a CHF 14.0 million ($15.1 million) loan. The CHF 3.5 million loan bears interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears interest at a rate of 3.55% and matures on January 31, 2033. At January 31, 2012, $16.6 million was outstanding. The bank has a secured interest in the factory building.
	Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, amounting to ¥1,250 million ($16.1 million). Harry Winston Japan, K.K. also maintains a secured credit agreement amounting to ¥575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K. At January 31, 2012, $23.6 million was outstanding.
	The Company’s first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, may be prepaid at any time, and matures on September 1, 2018. On January 31, 2012, $6.3 million was outstanding on the mortgage.
(b)	Interest on loans and borrowings is calculated at various fixed and floating rates. Projected interest payments on the current debt outstanding were based on interest rates in effect at January 31, 2012, and have been included under interest-bearing loans and borrowings in the table above. Interest payments for the next twelve months are approximated to be $10.3 million.
(c)	The Joint Venture, under environmental and other agreements, must provide funding for the Environmental Monitoring Advisory Board. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. The operator of the Joint Venture has fulfilled such obligations for the security deposits by posting letters of credit of which HWDLP’s share as at January 31, 2012, was $81.1 million based on its 40% ownership interest in the Diavik Diamond Mine. There can be no assurance that the operator will continue its practice of posting letters of credit in fulfillment of this obligation, in which event HWDLP would be required to post its proportionate share of such security directly, which would result in additional constraints on liquidity. The requirement to post security for the reclamation and abandonment obligations may be reduced to the extent of amounts spent by the Joint Venture on those activities. The Joint Venture has also signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of area Aboriginal bands. The actual cash outlay for the Joint Venture’s obligations under these agreements is not anticipated to occur until later in the life of the Diavik Diamond Mine.

Harry Winston Diamond Corporation | 2012 Annual Report 21

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

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

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

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

CONSOLIDATED

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																					CDN GAAP
		2012		2012			2012		2012		2011		2011		2011		2011		2012		2011		2010
		Q4		Q3			Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Operating profit (loss)	$	30,710	$	(1,963	)	$	23,100	$	4,685	$	21,245	$	14,830	$	29,932	$	2,341	$	56,531	$	68,348	$	(21,971	)
Depreciation and amortization		27,512		23,121			20,716		20,291		24,635		18,657		19,515		14,200		91,639		77,007		64,112
EBITDA	$	58,222	$	21,158		$	43,816	$	24,976	$	45,880	$	33,487	$	49,447	$	16,541	$	148,170	$	145,355	$	42,141

MINING SEGMENT

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																					CDN GAAP
		2012		2012			2012		2012		2011		2011		2011		2011		2012		2011		2010
		Q4		Q3			Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Operating profit (loss)	$	27,388	$	(1,147	)	$	18,506	$	3,962	$	17,858	$	12,638	$	29,547	$	2,221	$	48,709	$	62,264	$	(6,268	)
Depreciation and amortization		24,284		19,932			17,461		17,083		20,669		15,428		16,352		10,975		78,760		63,424		51,154
EBITDA	$	51,672	$	18,785		$	35,967	$	21,045	$	38,527	$	28,066	$	45,899	$	13,196	$	127,469	$	125,688	$	44,886

LUXURY BRAND SEGMENT

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																				CDN GAAP
		2012		2012		2012		2012		2011		2011		2011		2011		2012		2011		2010
		Q4		Q3		Q2		Q1		Q4		Q3		Q2		Q1		Total		Total		Total
Operating profit (loss)	$	6,832	$	1,464	$	6,926	$	4,223	$	5,277	$	5,552	$	2,481	$	1,594	$	19,445	$	14,904	$	(15,703	)
Depreciation and amortization		3,089		3,048		3,115		3,069		3,688		2,882		2,816		2,878		12,321		12,264		12,958
EBITDA	$	9,921	$	4,512	$	10,041	$	7,292	$	8,965	$	8,434	$	5,297	$	4,472	$	31,766	$	27,168	$	(2,745	)

CORPORATE SEGMENT

(expressed in thousands of United States dollars)
(quarterly results are unaudited)
		IFRS																														CDN GAAP
		2012			2012			2012			2012			2011			2011			2011			2011			2012			2011			2010
		Q4			Q3			Q2			Q1			Q4			Q3			Q2			Q1			Total			Total			Total
Operating profit (loss)	$	(3,510	)		(2,280	)		(2,332	)		(3,500	)		(1,890	)		(3,360	)		(2,096	)		(1,474	)		(11,623	)		(8,820	)	$	–
Depreciation and amortization		139			141			140			139			278			347			347			347			558			1,319			–
EBITDA	$	(3,371	)	$	(2,139	)	$	(2,192	)	$	(3,361	)	$	(1,612	)	$	(3,013	)	$	(1,749	)	$	(1,127	)	$	(11,065	)	$	(7,501	)	$	–

22 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

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

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

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

Diamond Prices and Demand for Diamonds
The profitability of the Company is dependent upon production from the Diavik Diamond Mine and on the results of the operations of its luxury brand operations. Each, in turn, is dependent in significant part upon the worldwide demand for and price of diamonds. Diamond prices fluctuate and are affected by numerous factors beyond the control of the Company, including worldwide economic trends, particularly in the US, Japan, China and India, worldwide levels of diamond discovery and production, and the level of demand for, and discretionary spending on, luxury goods such as diamonds and jewelry. Low or negative growth in the worldwide economy, renewed or additional credit market disruptions, natural disasters or the occurrence of terrorist attacks or similar activities creating disruptions in economic growth could result in decreased demand for luxury goods such as diamonds and jewelry, thereby negatively affecting the price of diamonds and jewelry. Similarly, a substantial increase in the worldwide level of diamond production or in diamonds available for sale through recommencement of suspended mining activity or the release of stocks held back during recent periods of low demand could also negatively affect the price of diamonds. In each case, such developments could have a material adverse effect on the Company’s results of operations.

Harry Winston Diamond Corporation | 2012 Annual Report 23

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Economic Environment
The Company’s financial results are tied to the global economic conditions and their impact on levels of consumer confidence and consumer spending. The global markets have experienced the impact of a significant US and international economic downturn since the fall of 2008. This has restricted the Company’s growth opportunities both domestically and internationally, and a return to a recession or weak recovery, due to recent disruptions in financial markets in the US, the Eurozone or elsewhere, the 2011 disaster in Japan and political upheavals in the Middle East, could cause the Company to experience revenue declines across both of its business segments due to deteriorated consumer confidence and spending, and a decrease in the availability of credit, which could have a material adverse effect on the Company’s business prospects or financial condition. The credit facilities essential to the diamond polishing industry are largely underwritten by European banks that are currently under stress with the European sovereign debt issue. The withdrawal or reduction of such facilities could also have a material adverse effect on the Company’s business prospects or financial condition. The Company monitors economic developments in the markets in which it operates and uses this information in its continuous strategic and operational planning in an effort to adjust its business in response to changing economic conditions.

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

Licences and Permits
The operation of the Diavik Diamond Mine and exploration on the Diavik property requires licences and permits from the Canadian government. The Diavik Diamond Mine Type “A” Water Licence was renewed by the regional Wek’eezhii Land and Water Board to October 31, 2015. While the Company anticipates that DDMI, the operator of the Diavik Diamond Mine, will be able to renew this licence and other necessary permits in the future, there can be no guarantee that DDMI will be able to do so or obtain or maintain all other necessary licences and permits that may be required to maintain the operation of the Diavik Diamond Mine or to further explore and develop the Diavik property.

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

24 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Climate Change
The Canadian government has established a number of policy measures in response to concerns relating to climate change. While the impact of these measures cannot be quantified at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation; restrict industrial emission levels; impose added costs for emissions in excess of permitted levels; and increase costs for monitoring and reporting. Compliance with these initiatives could have a material adverse effect on the Company’s results of operations.

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

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

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

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

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

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

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

Harry Winston Diamond Corporation | 2012 Annual Report 25

MANAGEMENT’S DISCUSSION AND ANALYSIS

Expansion and Refurbishment of the Existing Salon Network
A key component of the Company’s luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company in the luxury brand segment is to achieve a compound annual growth rate in sales in the mid-teens and an operating profit in the low to mid-teens, in each case by fiscal 2016. Although the Company considers these objectives to be reasonable, they are subject to a number of risks and uncertainties, and there can be no assurance that these objectives will be realized. This strategy requires the Company to make ongoing capital expenditures to build and open new salons, to refurbish existing salons from time to time, and to incur additional operating expenses in order to operate the new salons. To date, much of this expansion has been financed by Harry Winston Inc. through borrowings. The successful expansion of the Company’s global salon network, and achieving an increase in sales and in operating profit, will depend on a variety of factors, including worldwide economic conditions, market demand for luxury goods, the strength of the Harry Winston brand and the availability of sufficient funding. There can be no assurance that the expansion of the salon network will continue or that the current expansion will prove successful in increasing annual sales or earnings from the luxury brand segment, and the increased debt levels resulting from this expansion could negatively impact the Company’s liquidity and its results from operations in the absence of increased sales and earnings.

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

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

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

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 IFRS 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, 2012.

26 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2012, 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.

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 the management of the Company 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, 2012, 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.

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

Use of Estimates
The preparation of financial statements in conformity with IFRS 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 property, plant and equipment, intangible assets, goodwill and deferred mineral property costs, estimation of future site restoration costs and deferred 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. Such timing and measurement uncertainty could have a material effect on the reported results of operations and the financial position of the Company.

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

Deferred Mineral Property Costs and Mineral Reserves
Harry Winston Diamond Corporation capitalizes all direct development and pre-production costs relating to mineral properties and amortizes such costs on a unit-of-production basis upon commencement of commercial production relating to the underlying property. 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.

Harry Winston Diamond Corporation | 2012 Annual Report 27

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 lead to an impairment of deferred mineral property 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, 2012, 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 carrying value, the excess of the carrying 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.

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

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

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

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

28 Harry Winston Diamond Corporation | 2012 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS

Outstanding Share Information

As at March 31, 2012
Authorized	Unlimited
Issued and outstanding shares	84,874,781
Options outstanding	2,390,899
Fully diluted	87,265,680

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.

Harry Winston Diamond Corporation | 2012 Annual Report 29

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 International Financial Reporting Standards.

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.

(SIGNED) “ROBERT A. GANNICOTT”	(SIGNED) “CYRILLE BAUDET”
ROBERT A. GANNICOTT	CYRILLE BAUDET
CHIEF EXECUTIVE OFFICER	GROUP CHIEF FINANCIAL OFFICER

30 Harry Winston Diamond Corporation | 2012 Annual Report

Independent Auditors’ Report of Registered
Public Accounting Firm

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

We have audited the accompanying consolidated financial statements of Harry Winston Diamond Corporation, which comprise the consolidated balance sheets as at January 31, 2012, January 31, 2011 and February 1, 2010, the consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years ended January 31, 2012 and January 31, 2011, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Harry Winston Diamond Corporation as at January 31, 2012, January 31, 2011 and February 1, 2010, and its consolidated financial performance and its consolidated cash flows for the years ended January 31, 2012 and January 31, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Harry Winston Diamond Corporation’s internal control over financial reporting as of January 31, 2012, 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 23, 2012 expressed an unmodified (unqualified) opinion on the effectiveness of Harry Winston Diamond Corporation’s internal control over financial reporting.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
April 23, 2012
 

Harry Winston Diamond Corporation | 2012 Annual Report 31

Report of Independent Registered Public
Accounting Firm

To the Board of Directors of Harry Winston Diamond Corporation

We have audited Harry Winston Diamond Corporation’s internal control over financial reporting as of January 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Harry Winston Diamond Corporation’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, in Management’s Annual Report on Internal Control over Financial Reporting included in its annual report on Form 40-F for the year ended January 31, 2012. 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, Harry Winston Diamond Corporation maintained, in all material respects, effective internal control over financial reporting as of January 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial position of the Company as of January 31, 2012, January 31, 2011 and February 1, 2010 and its consolidated financial performance and its consolidated cash flows for the years ended January 31, 2012 and January 31, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and our report dated April 23, 2012 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
April 23, 2012
 

32 Harry Winston Diamond Corporation | 2012 Annual Report

Consolidated Balance Sheets
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

As at January 31,		2012		2011		February 1,
						2010
ASSETS
Current assets
Cash and cash equivalents (note 4)	$	78,116	$	108,693	$	62,969
Accounts receivable (note 5)		26,910		22,788		23,598
Inventory and supplies (note 6)		457,827		403,212		311,188
Other current assets (note 7)		45,494		41,317		39,299
		608,347		576,010		437,054
Property, plant and equipment – Mining (note 8)		734,146		764,093		783,432
Property, plant and equipment – Luxury brand (note 8)		69,781		61,019		62,277
Intangible assets, net (note 10)		127,337		127,894		129,213
Other non-current assets (note 11)		14,165		14,521		15,629
Deferred income tax assets (note 14)		77,160		60,038		50,524
Total assets	$	1,630,936	$	1,603,575	$	1,478,129
LIABILITIES AND EQUITY
Current liabilities
Trade and other payables (note 12)	$	104,681	$	139,551	$	75,893
Employee benefit plans (note 13)		6,026		4,317		11,284
Income taxes payable (note 14)		29,450		6,660		46,297
Promissory note (note 15)		–		70,000		–
Current portion of interest-bearing loans and borrowings (note 15)		29,238		24,215		23,831
		169,395		244,743		157,305
Interest-bearing loans and borrowings (note 15)		270,485		235,516		161,691
Deferred income tax liabilities (note 14)		325,035		309,868		246,398
Employee benefit plans (note 13)		9,463		7,287		6,898
Provisions (note 16)		65,245		50,130		43,691
Total liabilities		839,623		847,544		615,983
Equity
Share capital (note 17)		507,975		502,129		426,593
Contributed surplus		17,764		16,233		17,730
Retained earnings		255,233		229,779		242,057
Accumulated other comprehensive income		10,086		7,624		(2,571	)
Total shareholders’ equity		791,058		755,765		683,809
Non-controlling interest		255		266		178,337
Total equity		791,313		756,031		862,146
Total liabilities and equity	$	1,630,936	$	1,603,575	$	1,478,129

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

ON BEHALF OF THE BOARD:

(SIGNED) “ROBERT A. GANNICOTT”	(SIGNED) "NOEL HARWERTH "
ROBERT A. GANNICOTT	NOEL HARWERTH
DIRECTOR	DIRECTOR

Harry Winston Diamond Corporation | 2012 Annual Report 33

Consolidated Income Statements
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)

Years ended January 31,		2012			2011
Sales	$	702,043		$	623,963
Cost of sales		451,960			387,665
Gross margin		250,083			236,298
Selling, general and administrative expenses		193,552			167,950
Operating profit		56,531			68,348
Finance expenses		(16,687	)		(13,427	)
Exploration costs		(1,770	)		(666	)
Finance and other income		586			669
Foreign exchange gain		1,005			357
Profit before income taxes		39,665			55,281
Net income tax expense (note 14)		14,222			8,080
Net profit	$	25,443		$	47,201
Attributable to shareholders	$	25,454		$	41,530
Attributable to non-controlling interest	$	(11	)	$	5,671
Earnings per share (note 19)
Basic	$	0.30		$	0.52
Diluted	$	0.30		$	0.51
Weighted average number of shares outstanding		84,660,766			79,858,018

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

Consolidated Statements of Comprehensive Income
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

Years ended January 31,		2012			2011
Net profit	$	25,443		$	47,201
Other comprehensive income
Net gain (loss) on translation of net foreign operations (net of tax of nil)		3,634			10,879
Change in fair value of derivative financial instruments (net of tax of $0.2 million for the year ended January 31, 2011)		–			354
Actuarial loss on employee benefit plans (net of tax of $0.6 million for the year ended January 31, 2012 ; 2011 – $0.2 million)		(1,172	)		(1,038	)
Other comprehensive income, net of tax		2,462			10,195
Total comprehensive income	$	27,905		$	57,396
Attributable to shareholders	$	27,916		$	51,725
Attributable to non-controlling interest	$	(11	)	$	5,671

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

34 Harry Winston Diamond Corporation | 2012 Annual Report

Consolidated Statements of Changes in Equity
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

Years ended January 31,		2012			2011
Common shares:
Balance at beginning of period	$	502,129		$	426,593
Issued during the period		5,286			72,701
Transfer from contributed surplus on exercise of options		560			2,835
Balance at end of period		507,975			502,129
Contributed surplus:
Balance at beginning of period		16,233			17,730
Stock-based compensation expense		2,091			1,338
Transfer from contributed surplus on exercise of options		(560	)		(2,835	)
Balance at end of period		17,764			16,233
Retained earnings:
Balance at beginning of period		229,779			242,057
Net profit attributable to common shareholders		25,454			41,530
Reacquisition of partnership units (including transaction costs)		–			(53,808	)
Balance at end of period		255,233			229,779
Accumulated other comprehensive income:
Balance at beginning of period		7,624			(2,571	)
Other comprehensive income
Net gain on translation of net foreign operations (net of tax of nil)		3,634			10,879
Change in fair value of derivative financial instruments (net of tax of $0.2 million for the year ended January 31, 2011)		–			354
Actuarial loss on employee benefit plans (net of tax of $0.6 million for the year ended January 31, 2012 ; 2011 – $0.2 million)		(1,172	)		(1,038	)
Balance at end of period		10,086			7,624
Non-controlling interest:
Balance at beginning of period		266			178,337
Non-controlling interest		(11	)		5,671
Distribution to Kinross		–			(9,900	)
Reacquisition of Kinross interest		–			(173,842	)
Balance at end of period		255			266
Total shareholders’ equity	$	791,313		$	756,031

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

Harry Winston Diamond Corporation | 2012 Annual Report 35

Consolidated Statements of Cash Flows
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)

Years ended January 31,		2012			2011
Cash provided by (used in)
OPERATING
Net profit	$	25,443		$	47,201
Depreciation and amortization		91,639			77,007
Deferred income tax expense (recovery)		(1,088	)		16,817
Current income tax expense		15,310			(8,737	)
Finance expenses		16,687			13,427
Stock-based compensation		2,091			1,338
Other non-cash items		556			390
Foreign exchange gain (loss)		(5,771	)		1,806
Loss on disposal of assets		9			237
Change in non-cash operating working capital, excluding taxes and finance expenses		(79,517	)		(34,792	)
Cash provided from operating activities		65,359			114,694
Interest paid		(14,347	)		(8,958	)
Income and mining taxes paid		7,979			(31,763	)
Net cash from operating activities		58,991			73,973
FINANCING
Decrease in interest-bearing loans and borrowings		(709	)		(1,399	)
Increase in revolving credit		266,495			288,366
Decrease in revolving credit		(226,402	)		(211,721	)
Repayment of promissory note		(70,000	)		–
Issue of common shares, net of issue costs		5,286			2,964
Distribution to Kinross		–			(9,900	)
Cash provided from financing activities		(25,330	)		68,310
INVESTING
Reacquisition of partnership units		–			(51,450	)
Property, plant and equipment – Mining		(45,165	)		(41,859	)
Property, plant and equipment – Luxury brand		(19,681	)		(6,751	)
Other non-current assets		(1,889	)		(3,230	)
Cash used in investing activities		(66,735	)		(103,290	)
Foreign exchange effect on cash balances		2,497			6,731
Increase (decrease) in cash and cash equivalents		(30,577	)		45,724
Cash and cash equivalents, beginning of period		108,693			62,969
Cash and cash equivalents, end of period	$	78,116		$	108,693
Change in non-cash operating working capital, excluding taxes and finance expenses
Accounts receivable		(4,277	)		1,029
Inventory and supplies		(41,953	)		(87,066	)
Other current assets		(4,178	)		(2,024	)
Trade and other payables		(31,202	)		60,114
Employee benefit plans		2,093			(6,845	)
	$	(79,517	)	$	(34,792	)

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

36 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated Financial Statements
JANUARY 31, 2012 WITH COMPARATIVE FIGURES
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT AS OTHERWISE NOTED)

Note 1:
Nature of Operations
Harry Winston Diamond Corporation (the “Company”) is a diamond enterprise with assets in the mining and luxury brand segments of the diamond industry.

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

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

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

These consolidated financial statements have been approved for issue by the Board of Directors on April 4, 2012.

Note 2:
Basis of Preparation

(a)	Statement of compliance
	These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These are the Company’s first annual consolidated financial statements under IFRS for the fiscal year ending January 31, 2012. The accounting policies adopted in these consolidated financial statements are based on IFRS as issued by the International Accounting Standards Board (“IASB”) as of January 31, 2012.
(b)	Basis of measurement
	These consolidated financial statements have been prepared on the historical cost basis except for the following:
		financial instruments through profit and loss are measured at fair value.
		liabilities for Restricted Share Unit and Deferred Share Unit Plans are measured at fair value.
(c)	Currency of presentation
	These consolidated financial statements are expressed in United States dollars, consistent with the predominant functional currency of the Company’s operations. All financial information presented in United States dollars has been rounded to the nearest thousand.

Note 3:
Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Company entities.

(a)	Basis of consolidation
	The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at January 31, 2012. Subsidiaries are fully consolidated from the date of acquisition or creation, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany balances, income and expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated in full. For partly owned subsidiaries, the net assets and net earnings attributable to minority shareholders are presented as non-controlling interests on the consolidated balance sheet.
	Interest in Diavik Joint Venture
	HWDLP owns an undivided 40% ownership interest in the assets, liabilities and expenses of the Joint Venture. The Company records its interest in the assets, liabilities and expenses of the Joint Venture in its consolidated financial statements with a one-month lag. The accounting policies described below include those of the Joint Venture.

Harry Winston Diamond Corporation | 2012 Annual Report 37

Notes to Consolidated FINANCIAL Statements

(b)	Revenue
	Sales from the sale of rough diamonds, fine jewelry and watches are recognized when significant risks and rewards of ownership are transferred to the customer, the amount of sales can be measured reliably and the receipt of future economic benefits are probable. Sales are measured at the fair value of the consideration received or receivable, net of value-added taxes, duties and other sales taxes, and after eliminating sales within the Company.
(c)	Cash resources
	Cash and cash equivalents 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 fair value.
(d)	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.
(e)	Inventory and supplies
	Luxury brand raw materials and work-in-progress are valued at the lower of cost and net realizable value, with cost determined using either a weighted average or specific item identification basis depending on the nature of the inventory. Work-in-progress costs include an appropriate share of production costs such as material, labour and overhead costs.
	Luxury brand merchandise inventory is recorded at the lower of cost or net realizable value and includes jewelry and watches. Cost is determined on a specific item basis for jewelry and the average cost method is used for watches.
	Mining 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.
	Mining supplies inventory is recorded at the lower of cost or net realizable value. Supplies inventory includes consumables and spare parts maintained at the Diavik Diamond Mine site and at the Company’s sorting and distribution facility locations.
	Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling the final product. In order to determine net realizable value, the carrying amount of obsolete and slow moving items is written down on a basis of an estimate of their future use or realization. A provision for obsolescence is made when the carrying amount is higher than net realizable value.
(f)	Exploration, evaluation and development expenditures
	Exploration and evaluation activities include: acquisition of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching and sampling; and activities involved in evaluating the technical feasibility and commercial viability of extracting mineral resources. Capitalized exploration and evaluation expenditures are recorded as a component of property, plant and equipment. Exploration and evaluation assets are no longer classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Before reclassification, exploration and evaluation assets are assessed for impairment. Recognized exploration and evaluation assets will be assessed for impairment when the facts and circumstances suggest that the carrying amount may exceed its recoverable amount.
	Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at either (a) obtaining additional information on the ore body that is classified within proven and probable reserves, or (b) converting non- reserve mineralization to proven and probable reserves and the benefit is expected to be realized over an extended period of time. All other drilling and related costs are expensed as incurred.
(g)	Property, plant and equipment
	Items of property, plant and equipment are measured at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price and construction cost, any costs directly attributable to bringing the asset into operation, including stripping costs incurred in open pit mining before production commences, the initial estimate of the rehabilitation obligation, and for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Also included within property, plant and equipment is the capitalized value of finance leases.

38 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

When parts of an item of property, plant and equipment have different useful lives, the parts are accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from the disposal with the carrying amount of property, plant and equipment and are recognized within cost of sales and selling, general and administrative expenses.
(i)	DEPRECIATION
	Depreciation commences when the asset is available for use. Depreciation is charged so as to write off the depreciable amount of the asset to its residual value over its estimated useful life, using a method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Company. Depreciation methods, useful lives and residual values are reviewed, and adjusted if appropriate, at each reporting date.
	The unit-of-production method is applied to a substantial portion of Diavik Diamond Mine property, plant and equipment, and, depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable ore reserves of the ore deposit being mined, or to the total ore deposit. Other plant, property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets, for the current and comparative periods, which are as follows:

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

	Amortization for mine related assets was charged to mineral properties during the pre-commercial production stage.
	Upon the disposition of an asset, the accumulated depreciation and accumulated impairment losses are deducted from the original cost, and any gain or loss is reflected in current net profit or loss.
	Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. The impact of changes to the estimated useful lives or residual values is accounted for prospectively.
(ii)	STRIPPING COSTS
	Mining costs associated with stripping activities in an open pit mine are expensed unless the stripping activity can be shown to represent a betterment to the mineral property, in which case the stripping costs would be capitalized and included in deferred mineral property costs within mining assets. Stripping costs incurred during the production phase of an open pit mine are variable production costs that are included as a component of inventory to be recognized as a component of cost of sales in the same period as the sale of inventory.
(iii)	MAJOR MAINTENANCE AND REPAIRS
	Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets and overhaul costs. When an asset, or part of an asset that was separately depreciated, is replaced and it is probable that future economic benefits associated with the new asset will flow to the Company through an extended life, the expenditure is capitalized. The unamortized value of the existing asset or part of the existing asset that is being replaced is expensed. Where part of the existing asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced assets, which is immediately written off. All other day-to-day maintenance costs are expensed as incurred.

(h)	Intangible assets
	Intangible assets acquired separately are measured on initial recognition at cost, which comprises its purchase price plus any directly attributable cost of preparing the asset for its intended use. The cost of intangible assets acquired in a business combination is measured at fair value as at the date of acquisition.
	Intangible assets with indefinite useful lives are not amortized after initial recognition and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset is impaired. Harry Winston’s trademark and drawings are considered to have an indefinite life because it is expected that these assets will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are very closely related with the brand and have an enduring life expectancy. The archive of drawings reflects unique designs for jewelry and watches that form the basis for newly inspired jewelry and watch designs that are exclusive to Harry Winston and attract its clientele.

Harry Winston Diamond Corporation | 2012 Annual Report 39

Notes to Consolidated FINANCIAL Statements

Following initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite useful lives are amortized on a straight-line basis over their useful lives and recognized in profit or loss as follows:

Asset	Estimated useful life (years)
Wholesale distribution network	10

	The amortization methods and estimated useful lives of intangible assets are reviewed annually and adjusted if appropriate.
(i)	Other non-current assets
	Other non-current assets include depreciable assets amortized over a period not exceeding ten years.
(j)	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 profit or loss.
(k)	Provisions
	Provisions represent obligations to the Company for which the amount or timing is uncertain. Provisions are recognized when (a) the Company has a present obligation (legal or constructive) as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is included in net profit or loss. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the obligation. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost in net profit or loss.
	Mine rehabilitation and site restoration provision:
	The Company records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. The nature of these restoration activities includes dismantling and removing structures, rehabilitating mines and tailings dams, dismantling operating facilities, closure of plant and waste sites, and restoration, reclamation and re-vegetation of affected areas.
	The obligations generally arise when the asset is installed or the ground/environment is disturbed at the production location. When the liability is initially recognized, the present value of the estimated cost is capitalized by increasing the carrying amount of the related assets. Over time, the discounted liability is increased/decreased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. Additional disturbances or changes in rehabilitation costs, including re- measurement from changes in the discount rate, are recognized as additions or charges to the corresponding assets and rehabilitation liability when they occur. The periodic unwinding of the discount is recognized in net profit or loss as a finance cost.
(l)	Foreign currency
	Foreign currency translation
	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 net profit or loss.
	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 reporting date. Sales 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. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign exchange reserve account is reclassified to net profit or loss as part of profit or loss on disposal.

40 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(m)	Income taxes
	Current and deferred taxes
	Income tax expense comprises current and deferred tax and is recognized in net profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity or in other comprehensive income.
	Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax expense is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax expense is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
	A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is probable that the related tax benefit will not be realized.
	Deferred income and mining tax assets and deferred income and mining tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
	The Company classifies exchange differences on deferred tax assets or liabilities in jurisdictions where the functional currency is different from the currency used for tax purposes as income tax expense.
(n)	Stock-based payment transactions
	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. When option awards vest in installments over the vesting period, each installment is accounted for as a separate arrangement. The estimated fair value of the options is recorded as an expense with an offsetting credit to shareholders’ equity. Any consideration received on amounts attributable to stock options is credited to share capital.
	Restricted and Deferred Share Unit Plans
	The Restricted and Deferred Share Unit (“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 Directors approval. Under the prior RSU Plan, each RSU grant vests on the third anniversary of the grant date. Under the 2010 RSU Plan, each RSU grant vests equally over a three-year period. Vesting under both RSU Plans is subject to special rules for death, disability and change in control. Grants under the DSU Plan are awarded to non-executive directors of the Company. Each DSU grant vests immediately on the grant date. The expenses related to the RSUs and DSUs are accrued based on fair value. When a share-based payment award vests in installments over the vesting period, each installment is accounted for as a separate arrangement. These awards are accounted for as liabilities with the value of these liabilities being remeasured at each reporting date based on changes in the fair value of the awards, and at settlement date. Any changes in the fair value of the liability are recognized as employee benefit plan expense in net profit or loss.
(o)	Employee benefit plans
	The Company operates defined benefit pension plans, which require contributions to be made to separately administered funds. The cost of providing benefits under the defined benefit plans is determined separately using the projected unit credit valuation method by qualified actuaries. Actuarial gains and losses are recognized immediately in other comprehensive income.
	The defined benefit asset or liability comprises the present value of the defined benefit obligation, plus any actuarial gains (less any losses) not recognized as a result of the treatment above, less past service cost not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
	Contributions to defined contribution pension plans are expensed as incurred.

Harry Winston Diamond Corporation | 2012 Annual Report 41

Notes to Consolidated FINANCIAL Statements

(p)	Segment reporting
	A segment is a distinguishable component of the Company that is engaged either in providing related products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. The Company’s primary format for segment reporting is based on business segments. Each operating segment’s operations are reviewed regularly by the Company’s Chief Executive Officer to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.
(q)	Operating leases
	Minimum rent payments under operating leases, including any rent-free periods and/or construction allowances, are recognized on a straight-line basis over the term of the lease and included in net profit or loss.
(r)	Impairment of non-financial assets
	The carrying amounts of the Company’s non-financial assets other than inventory and deferred taxes are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For an intangible asset that has an indefinite life, the recoverable amount is estimated annually at the same time, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
	The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. In the absence of a binding sales agreement, fair value is estimated on the basis of values obtained from an active market or from recent transactions or on the basis of the best information available that reflects the amount that the Company could obtain from the disposal of the asset. Value in use is defined as the present value of future pre-tax cash flows expected to be derived from the use of an asset, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).
	An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset. Impairment losses recognized in respect of cash-generating units would be allocated to reduce the carrying amounts of the assets in the unit (group of units) on a pro rata basis.
	For property, plant and equipment, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income.
(s)	Basic and diluted earnings per share
	Basic earnings per share are calculated by dividing net profit or loss by the weighted average number of shares outstanding during the period. Diluted earnings per share are determined using the treasury stock method to calculate the dilutive effect of options and warrants. The treasury stock method assumes that 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 period. Options with an exercise price higher than the average market value for the period are not included in the calculation of diluted earnings per share as such options are not dilutive.

42 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(t)	Use of estimates, judgments and assumptions
	The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and contingent liabilities at the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is as follows:
	Mineral reserves, mineral properties and exploration costs
	The estimation of mineral reserves is a subjective process. The Company estimates its mineral reserves based on information compiled by an appropriately qualified person. 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 may impact the carrying value of exploration and evaluation assets, mineral properties, property, plant and equipment, mine rehabilitation and site restoration provision, recognition of deferred tax assets, and depreciation charges. Estimates and assumptions about future events and circumstances are also used to determine whether economically viable reserves exist that can lead to commercial development of an ore body.
	Estimated mineral reserves are used in determining the depreciation of mine-specific assets. This results in a depreciation charge proportional to the depletion of the anticipated remaining life of mine production. A units-of-production depreciation method is applied, and depending on the asset, is based on carats of diamonds recovered during the period relative to the estimated proven and probable reserves of the ore deposit being mined or to the total ore deposit. Changes in estimates are accounted for prospectively.
	Impairment of long-lived assets
	The Company assesses each cash-generating unit at least annually to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value of an asset less costs to sell and its value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, exploration potential and operating performance. Financial results as determined by actual events could differ from those estimated.
	Impairment of intangible assets with an indefinite life
	The impairment assessment for trademark and drawings requires the use of estimates and assumptions. Financial results as determined by actual events could differ from those estimated.
	Recovery of deferred tax assets
	Judgment is required in determining whether deferred tax assets are recognized in the consolidated balance sheet. Deferred tax assets, including those arising from un-utilized tax losses, require management to assess the likelihood that the Company will generate taxable earnings in future periods in order to utilize recognized deferred tax assets. Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction. To the extent that future taxable income differs significantly from estimates, the ability of the Company to realize the deferred tax assets recorded at the consolidated balance sheet date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the ability of the Company to obtain tax deductions in future periods.

Harry Winston Diamond Corporation | 2012 Annual Report 43

Notes to Consolidated FINANCIAL Statements

	Mine rehabilitation and site restoration provision
	The mine rehabilitation and site restoration provision has been provided by management of the Diavik Diamond Mine and is based on internal estimates. Assumptions, based on the current economic environment, have been made which DDMI management believes are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly by management of the Diavik Diamond Mine to take into account any material changes to the assumptions. However, actual rehabilitation costs will ultimately depend upon future costs for the necessary decommissioning work required, which will reflect market conditions at the relevant time. Furthermore, the timing of rehabilitation is likely to depend on when the Diavik Diamond Mine ceases to produce at economically viable rates. This, in turn, will depend upon a number of factors including future diamond prices, which are inherently uncertain.
	Commitments and contingencies
	The Company has conducted its operations in the ordinary course of business in accordance with its understanding and interpretation of applicable tax legislation in the countries where the Company has operations. The relevant tax authorities could have a different interpretation of those tax laws that could lead to contingencies or additional liabilities for the Company. The Company believes that its tax filing positions as at the balance sheet date are appropriate and supportable. Should the ultimate tax liability materially differ from the provision, the Company’s effective tax rate and its profit or loss could be affected positively or negatively in the period in which the matters are resolved.
(u)	Standards issued but not yet effective
	The following standards and interpretations have been issued but are not yet effective and have not been early adopted in these financial statements.
	The IASB has issued a new standard, IFRS 9, “Financial Instruments” (“IFRS 9”), which will ultimately replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company’s fiscal year end beginning February 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
	IFRS 10, ”Consolidated Financial Statements“ (“IFRS 10”), was issued by the IASB on May 12, 2011, and will replace the consolidation requirements in SIC-12, “Consolidation – Special Purpose Entities” and IAS 27, “Consolidated and Separate Financial Statements”. The new standard establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and provides guidance to assist in the determination of control where it is difficult to assess. IFRS 10 is effective for the Company’s fiscal year end beginning February 1, 2013, with early adoption permitted. The Company is currently assessing the impact of IFRS 10 on its consolidated financial statements.

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

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

44 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements
 

Note 4:
Cash Resources

						February 1,
		2012		2011		2010
Cash on hand and balances with banks	$	76,030	$	107,993	$	61,449
Short-term investments (a)		2,086		700		1,520
Total cash resources	$	78,116	$	108,693	$	62,969
(a) Short-term investments are held in overnight deposits and money market instruments with a maturity of 30 days.

The Company’s exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.

Note 5:
Accounts Receivable

								February 1,
		2012			2011			2010
Luxury brand trade receivables	$	25,828		$	20,672		$	20,306
Mining other receivables		1,923			2,746			3,824
Luxury brand allowance for doubtful accounts		(841	)		(630	)		(532	)
Total accounts receivable	$	26,910		$	22,788		$	23,598

The Company’s exposure to interest rate risk and sensitivity analysis is disclosed in Note 23.

Note 6:
Inventory and Supplies

						February 1,
		2012		2011		2010
Luxury brand raw materials	$	62,188	$	50,109	$	43,139
Mining rough diamond inventory		62,472		30,451		25,318
		124,660		80,560		68,457
Luxury brand work-in-progress		45,407		29,904		13,406
Luxury brand merchandise inventory		218,844		226,358		161,104
Mining supplies inventory		68,916		66,390		68,221
Total inventory and supplies	$	457,827	$	403,212	$	311,188

Total inventory and supplies is net of a provision for obsolescence of $3.1 million ($2.9 million at January 31, 2011). Cost of sales includes inventory of $418.9 million sold during the year (2011 – $373.6 million), with another $33.1 million of non-inventoried costs (2011 – $14.1 million).

Note 7:
Other Current Assets

						February 1,
		2012		2011		2010
Luxury brand prepaid assets	$	10,264	$	10,916	$	10,704
Luxury brand other current assets		7,082		6,746		5,175
Mining prepaid assets		28,148		23,655		23,420
Total other current assets	$	45,494	$	41,317	$	39,299

Harry Winston Diamond Corporation | 2012 Annual Report 45

Notes to Consolidated FINANCIAL Statements

Note 8:
Property, Plant and Equipment

MINING SEGMENT
					Diavik					Real						Mine
					equipment			Furniture,		property –			Assets			rehabilitation
		Mineral			and			equipment		land and			under			and site
		properties(a)			leaseholds(b)			and other(c)		building(d)			construction			restoration(e)		Total
Cost:
Balance at February 1, 2011	$	250,047		$	768,515		$	7,927	$	35,227		$	82,135		$	40,291	$	1,184,142
Additions		–			–			1,379		2,450			41,352			13,180		58,361
Disposals		–			(942	)		–		–			–			–		(942	)
Impairments for the year		–			(13,193	)		–		–			–			–		(13,193	)
Foreign exchange differences		–			–			–		(100	)		–			–		(100	)
Transfers and other movements		(520	)		100,833			–		–			(100,313	)		–		–
Balance at January 31, 2012	$	249,527		$	855,213		$	9,306	$	37,577		$	23,174		$	53,471	$	1,228,268
Accumulated depreciation/amortization:
Balance at February 1, 2011	$	149,814		$	239,883		$	5,677	$	8,062		$	–		$	16,613	$	420,049
Depreciation and amortization for the year		12,254			58,304			351		1,293			–			2,833		75,035
Disposals		–			(942	)		–		–			–			–		(942	)
Foreign exchange differences		–			–			–		(20	)		–			–		(20	)
Balance at January 31, 2012		162,068			297,245			6,028		9,335			–			19,446		494,122
Net book value at January 31, 2012	$	87,459		$	557,968		$	3,278	$	28,242		$	23,174		$	34,025	$	734,146

46 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

					Diavik					Real					Mine
					equipment			Furniture,		property –		Assets			rehabilitation
		Mineral			and			equipment		land and		under			and site
		properties(a)			leaseholds(b)			and other(c)		building(d)		construction			restoration(e)		Total
Cost:
Balance at February 1, 2010	$	250,415		$	494,613		$	7,742	$	32,468	$	321,245		$	35,752	$	1,142,235
Additions		–			–			185		1,028		40,646			4,539		46,398
Disposals		–			(6,222	)		–		–		–			–		(6,222	)
Foreign exchange differences		–			–			–		1,731		–			–		1,731
Transfers and other movements		(368	)		280,124			–		–		(279,756	)		–		–
Balance at January 31, 2011	$	250,047		$	768,515		$	7,927	$	35,227	$	82,135		$	40,291	$	1,184,142
Accumulated depreciation/amortization:
Balance at February 1, 2010	$	136,223		$	196,587		$	5,319	$	6,696	$	–		$	13,978	$	358,803
Depreciation and amortization for the year		13,591			49,282			358		1,086		–			2,635		66,952
Disposals		–			(5,986	)		–		–		–			–		(5,986	)
Foreign exchange differences		–			–			–		280		–			–		280
Transfers and other movements		–			–			–		–		–			–		–
Balance at January 31, 2011		149,814			239,883			5,677		8,062		–			16,613		420,049
Net book value at January 31, 2011	$	100,233		$	528,632		$	2,250	$	27,165	$	82,135		$	23,678	$	764,093

Harry Winston Diamond Corporation | 2012 Annual Report 47

Notes to Consolidated FINANCIAL Statements

LUXURY BRAND SEGMENT
		Furniture,			Real property –
		equipment			land and			Assets under
		and other(c)			building(d)			construction		Total
Cost:
Balance at February 1, 2011	$	34,866		$	85,430		$	63	$	120,359
Additions		8,196			1,587			9,898		19,681
Disposals		(765	)		(1,366	)		–		(2,131	)
Foreign exchange differences		727			2,177			–		2,904
Balance at January 31, 2012		43,024			87,828			9,961		140,813
Accumulated depreciation/amortization:
Balance at February 1, 2011	$	23,879		$	35,461		$	–	$	59,340
Depreciation and amortization for the year		5,835			6,487			–		12,322
Disposals		(763	)		(1,358	)		–		(2,121	)
Foreign exchange differences		509			982			–		1,491
Balance at January 31, 2012		29,460			41,572			–		71,032
Net book value at January 31, 2012	$	13,564		$	46,256		$	9,961	$	69,781

		Furniture,			Real property –
		equipment			land and		Assets under
		and other(c)			building(d)		construction			Total
Cost:
Balance at February 1, 2010	$	29,278		$	77,244	$	241		$	106,763
Additions		2,475			–		4,276			6,751
Disposals		(266	)		–		–			(266	)
Foreign exchange differences		1,673			5,438		–			7,111
Transfers and other movements		1,706			2,748		(4,454	)		–
Balance at January 31, 2011	$	34,866		$	85,430	$	63		$	120,359
Accumulated depreciation/amortization:
Balance at February 1, 2010	$	18,139		$	26,347	$	–		$	44,486
Depreciation and amortization for the year		5,049			7,215		–			12,264
Disposals		(263	)		–		–			(263	)
Foreign exchange differences		954			1,899		–			2,853
Balance at January 31, 2011		23,879			35,461		–			59,340
Net book value at January 31, 2011	$	10,987		$	49,969	$	63		$	61,019

(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.
(e)	The Joint Venture has an obligation under various agreements (note 22) to reclaim and restore the lands disturbed by its mining operations.

Depreciation expense for 2012 was $87.4 million (2011 – $79.2 million).

48 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Note 9:
Diavik Joint Venture

The following represents HWDLP’s 40% interest in the Joint Venture at the period end as at December 31, 2011 and 2010:

		2011		2010
Current assets	$	101,454	$	92,487
Non-current assets		685,590		714,386
Current liabilities		31,745		31,493
Non-current liabilities and participant’s account		755,298		775,380

		2011			2010
Expenses net of interest income of $0.1 million (2010 – interest income of $0.1 million)(a)	$	257,807		$	205,541
Cash flows resulting from (used in) operating activities		(166,854	)		(129,851	)
Cash flows resulting from financing activities		214,834			168,045
Cash flows resulting from (used in) investing activities		(43,499	)		(40,105	)
(a) The Joint Venture only earns interest income.

HWDLP is contingently liable for DDMI’s portion of the liabilities of the Joint Venture, and to the extent HWDLP’s participating interest has increased because of the failure of DDMI to make a cash contribution when required, HWDLP would have access to an increased portion of the assets of the Joint Venture to settle these liabilities. Additional information on commitments and contingencies related to the Diavik Joint Venture is found in Note 22.

During fiscal 2012, the Company recognized a non-cash $13.0 million charge in cost of sales related to the de-recognition of certain components of the backfill plant (the “Paste Plant”) associated with paste production at the Diavik Diamond Mine. The original mine plan envisioned the use of blasthole stoping and underhand cut and fill underground mining methods for the Diavik ore bodies using paste to preserve underground stability. It is now expected that the higher velocity and lower cost sub-level retreat mining method, which does not require paste, will be used for both the A-154 South and A-418 underground ore bodies. As a result, certain components of the Paste Plant necessary for the production of paste will no longer be required and accordingly were de-recognized during the year.

Note 10:
Intangible Assets

						Wholesale
						distribution
		Trademark		Drawings		network		Total
Cost:
Balance at February 1, 2011	$	112,995	$	12,365	$	5,575	$	130,935
Additions		–		–		–		–
Balance at January 31, 2012		112,995		12,365		5,575		130,935
Accumulated amortization:
Balance at February 1, 2011	$	–	$	–	$	3,041	$	3,041
Amortization for the year		–		–		557		557
Balance at January 31, 2012		–		–		3,598		3,598
Net book value at January 31, 2012	$	112,995	$	12,365	$	1,977	$	127,337

Harry Winston Diamond Corporation | 2012 Annual Report 49

Notes to Consolidated FINANCIAL Statements

						Wholesale
						distribution		Store
		Trademark		Drawings		network		leases		Total
Cost:
Balance at February 1, 2010	$	112,995	$	12,365	$	5,575	$	5,639	$	136,574
Additions		–		–		–		–		–
Balance at January 31, 2011		112,995		12,365		5,575		5,639		136,574
Accumulated amortization:
Balance at February 1, 2010	$	–	$	–	$	2,483	$	4,878	$	7,361
Amortization for the year		–		–		558		761		1,319
Balance at January 31, 2011		–		–		3,041		5,639		8,680
Net book value at January 31, 2011	$	112,995	$	12,365	$	2,534	$	–	$	127,894

Trademark and drawings are considered to have an indefinite life because it is expected that they will contribute to net cash inflows indefinitely. For purposes of impairment testing, trademark and drawings are tested for recoverability individually. The Company maintains a program to protect its trademark from unauthorized use by third parties. The Harry Winston drawings are closely related with the brand and have an enduring life expectancy. The archive of drawings includes unique designs for jewelry and watches that form the basis for newly inspired product designs that are exclusive to Harry Winston. The carrying amount of the trademark and drawings was determined to be lower than its recoverable amount.

The test for impairment for the drawings is to compare the replacement cost of the drawings to the carrying amount. Replacement cost is based on the cost the Company would incur to reproduce the drawings.

The test for impairment for the trademark is to compare the recoverable amount to the carrying amount. To determine the recoverable amount, the Company uses a fair value less cost to sell (“FVLCS”) valuation premise, which is calculated using a relief-from-royalty approach. This approach conceptually recognizes that the trademark could be sold separately, and the purchaser could generate a future income stream through licensing agreements. Revenue projections are based on the most recent budget prepared by management. Key assumptions include those regarding the royalty rates, discount rate and terminal growth rate. The pre-tax discount rates are based on the weighted average cost of capital adjusted for specific company and market risk factors.

The key assumptions used in performing the trademark intangible test were as follows:

	2012	2011
Royalty rate – watches	7%	7%
Royalty rate – jewelry	3.5%	3%
Terminal growth rate	3%	3%
Discount rate	12%	12%

Note 11:
Other Non-Current Assets

						February 1,
		2012		2011		2010
Prepaid pricing discount(a), net of accumulated amortization of $10.3 million (2011 – $8.9 million)	$	1,680	$	3,120	$	4,560
Other assets		3,276		3,398		1,328
Refundable security deposits		9,209		8,003		9,741
	$	14,165	$	14,521	$	15,629

(a) Prepaid pricing discount represents funds paid to Tiffany & Co. 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.

50 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Note 12:
Trade and Other Payables

						February 1,
		2012		2011		2010
Trade and other payables	$	41,031	$	54,732	$	25,949
Accrued expenses		17,835		17,635		15,837
Customer deposits		14,070		38,752		9,175
Payables and accruals at the Diavik Joint Venture		31,745		28,432		24,932
	$	104,681	$	139,551	$	75,893

Note 13:
Employee Benefit Plans

The employee benefit obligation reflected in the consolidated balance sheet is as follows:

						February 1,
		2012		2011		2010
Defined benefit plan obligation – Harry Winston luxury brand segment (a)	$	11,381	$	9,009	$	7,104
Defined contribution plan obligation – Harry Winston luxury brand segment (b)		88		80		70
Deferred compensation plan obligation – Harry Winston luxury brand segment (b)		–		–		9,207
Post-retirement benefit plan – Diavik Diamond Mine (c)		289		–		–
RSU and DSU plans (note 17)		3,731		2,515		1,801
Total employee benefit plan obligation	$	15,489	$	11,604	$	18,182

						February 1,
		2012		2011		2010
Non-current	$	9,463	$	7,287	$	6,898
Current		6,026		4,317		11,284
Total employee benefit plan obligation	$	15,489	$	11,604	$	18,182

The amounts recognized in the consolidated income statement in respect of employee benefit plans are as follows:

		2012		2011
Defined benefit pension plan – Harry Winston luxury brand segment (a)	$	2,074	$	1,907
Defined contribution plan – Harry Winston luxury brand segment (b)		1,065		783
Defined contribution plan – Harry Winston mining segment (b)		207		218
Defined contribution plan – Diavik Diamond Mine (b)		2,081		1,061
Post-retirement benefit plan – Diavik Diamond Mine (c)		299		–
RSU and DSU plans (note 17)		2,169		936
	$	7,895	$	4,905
Share-based payments		2,091		1,338
Total employee benefit plan expense	$	9,986	$	6,243

Employee benefit plan expense has been included in the consolidated income statement as follows:

		2012		2011
Cost of sales	$	3,135	$	1,717
Selling, general and administrative expenses		6,851		4,526
	$	9,986	$	6,243

(a)

Defined benefit pension plan

The luxury brand segment sponsors three separate defined benefit pension plans covering 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 luxury brand 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.

Harry Winston Diamond Corporation | 2012 Annual Report 51

Notes to Consolidated FINANCIAL Statements

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

		2012			2011
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year	$	24,643		$	20,700
Service costs		1,788			1,646
Interest cost		904			857
Employee contributions		496			372
Actuarial gain		904			1,825
Other net expenses		(411	)		(387	)
Benefits paid		(1,554	)		(1,617	)
Foreign exchange		690			1,247
Balance, end of year		27,460			24,643
PLAN ASSETS
Fair value, beginning of year		15,656			13,728
Actual return on plan assets		(109	)		1,355
Employee and employer contributions		1,968			1,556
Other net expenses		(411	)		(387	)
Benefits paid		(1,112	)		(1,363	)
Foreign exchange		87			745
Fair value, end of year		16,079			15,634
Funded status – plan deficit	$	(11,381	)	$	(9,009	)

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

		2012			2011
Service cost	$	(1,788	)	$	(1,646	)
Interest cost		(904	)		(857	)
Expected return on plan assets		618			663
Amortization of prior service cost		–			(67	)
Total	$	(2,074	)	$	(1,907	)

(ii)	PLAN ASSETS
	US plan assets represented approximately 47% of total luxury brand segment plan assets at January 31, 2012. The net unfunded status of the luxury brand segment plans of $11.4 million is comprised of $4.2 million attributed to the US-based Harry Winston Inc. plan, $5.2 million attributed to the Harry Winston Japan, K.K. plan, and $2.0 million attributed to the Harry Winston S.A. plan. The Harry Winston Japan, K.K. plan is non-funded with a benefit obligation of $5.2 million.
	The asset allocation of luxury brand pension assets at January 31 was as follows:

	2012	2011
ASSET CATEGORY
Cash equivalents	1%	1%
Equity securities	52%	57%
Fixed income securities	34%	36%
Other	13%	6%
Total	100%	100%

52 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

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

	2012	2011
ACCRUED BENEFIT OBLIGATION
Discount rate – HW Inc.	4.84%	5.24%
Expected long-term rate of return – HW Inc.	7.50%	7.50%
Discount rate – Harry Winston Japan, K.K.	1.46%	1.58%
Expected long-term rate of return – Harry Winston Japan, K.K.	–%	–%
Discount rate – Harry Winston S.A.	2.50%	2.75%
Expected long-term rate of return – Harry Winston S.A.	3.50%	3.75%
BENEFIT COSTS FOR THE YEAR
Discount rate – HW Inc.	5.24%	5.56%
Expected long-term rate of return on plan assets – HW Inc.	7.50%	7.50%
Rate of compensation increase – HW Inc.	–%	–%
Discount rate – Harry Winston Japan, K.K.	1.58%	1.84%
Expected long-term rate of return on plan assets – Harry Winston Japan, K.K.	–%	–%
Rate of compensation increase – Harry Winston Japan, K.K.	4.21%	4.36%
Discount rate – Harry Winston S.A.	2.50%	2.75%
Expected long-term rate of return on plan assets – Harry Winston S.A.	3.50%	3.75%
Rate of compensation increase – Harry Winston S.A.	3.00%	3.00%

(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, 2012 and 2011, 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 sponsors a defined contribution plan for Canadian employees 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. The total defined contribution plan liability at January 31, 2012 was $0.1 million ($0.1 million at January 31, 2011).
(c)	Post-retirement benefit plan
	The Joint Venture provides non-pension post-retirement benefits to retired employees. The post-retirement benefit plan liability was $0.3 million at January 31, 2012 ($nil at January 31, 2011).

Note 14:
Income Taxes
The deferred income tax asset of the Company is $77.2 million, of which $50.4 million relates to the luxury brand segment. Included in the deferred tax asset is $36.9 million that has been recorded to recognize the benefit of $125.0 million of net operating losses that the Company has available for carry forward to shelter income taxes for future years. Certain net operating losses are scheduled to expire between 2013 and 2032.

The deferred income tax liability of the Company is $325.0 million of which $100.6 million relates to the luxury brand segment. The luxury brand segment deferred income tax liabilities include $52.1 million from a previous purchase price allocation. The Company’s deferred 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 as part of deferred tax expenses for each year.

Harry Winston Diamond Corporation | 2012 Annual Report 53

Notes to Consolidated FINANCIAL Statements

(a) The income tax provision consists of the following:

		2012			2011
CURRENT TAX EXPENSE
Current period	$	18,326		$	(8,616	)
Adjustment for prior period		(3,016	)		(121	)
Total current tax expense		15,310			(8,737	)
DEFERRED TAX EXPENSE
Origination and reversal of temporary differences		(45	)		17,315
Change in unrecognized deductible temporary differences		(525	)		(718	)
Current year losses for which no deferred tax asset was recognized		1,489			894
Recognition of previously unrecognized tax losses		(2,007	)		(674	)
Total deferred tax expense		(1,088	)		16,817
Total income tax expenses	$	14,222		$	8,080

(b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at January 31, 2012 and 2011 are as follows:

		2012			2011
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards	$	36,935		$	27,046
Property, plant and equipment		4,625			3,449
Future site restoration costs		23,161			16,450
Luxury brand inventory		6,211			6,169
Deferred mineral property costs		251			283
Other deferred income tax assets		5,977			6,641
Deferred income tax assets		77,160			60,038
DEFERRED INCOME TAX LIABILITIES:
Deferred mineral property costs		(29,339	)		(31,781	)
Property, plant and equipment		(160,616	)		(159,936	)
Future site restoration costs		(12,078	)		(7,059	)
Luxury brand inventory		(47,927	)		(34,630	)
Intangible assets		(52,081	)		(52,365	)
Other deferred income tax liabilities		(22,994	)		(24,097	)
Deferred income tax liabilities		(325,035	)		(309,868	)
Deferred income tax liabilities, net	$	(247,875	)	$	(249,830	)

Movement in net deferred tax liabilities:

		2012			2011
Balance at the beginning of the year	$	(249,831	)	$	(195,902	)
Recognized in profit (loss)		1,088			(16,817	)
Recognized in accumulated other comprehensive income		606			(647	)
Acquired on business combination		–			(36,464	)
Other		262			–
Balance at the end of the year	$	(247,875	)	$	(249,830	)

54 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(c)	Unrecognized deferred tax assets and liabilities:
	Deferred tax assets have not been recognized in respect of the following items:

		2012		2011
Tax losses	$	6,460	$	5,121
Deductible temporary differences		166		691
Total	$	6,626	$	5,812

The tax losses not recognized expire as per the amount and years noted below. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.

The following table summarizes the Company’s non-capital losses as at January 31, 2012 that may be applied against future taxable profit:

Jurisdiction	Type		Amount	Expiry Date
Luxemburg	Net operating losses	$	1,918	No expiry
France	Net operating losses		5,837	No expiry
United Kingdom	Net operating losses		9,021	No expiry
China	Net operating losses		5,840	2013 – 2017
Taiwan	Net operating losses		952	2022
Singapore	Net operating losses		521	No expiry

	The deductible temporary differences associated with investments in subsidiaries and joint ventures, for which a deferred tax asset has not been recognized, aggregate to $67.2 million (2011 – $71.2 million).
(d)	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 28% (2011 – 29%) is a result of the following:

		2012			2011
Expected income tax expense	$	11,106		$	16,030
Non-deductible (non-taxable) items		592			133
Impact of foreign exchange		1,153			(8,278	)
Northwest Territories mining royalty (net of income tax relief)		3,242			4,265
Earnings subject to tax different than statutory rate		1,687			918
Assessments and adjustments		(2,622	)		(2,254	)
Current year losses for which no deferred tax asset was recognized		1,489			894
Recognition of previously unrecognized tax losses		(2,007	)		(674	)
Change in unrecognized temporary differences		(525	)		(718	)
Other		107			(2,236	)
Recorded income tax expense (recovery)	$	14,222		$	8,080

(e) The mining segment has net operating loss carryforwards for Canadian income tax purposes of approximately $1.2 million and $1.9 million for other foreign jurisdictions’ tax purposes. The luxury brand segment has net operating loss carryforwards for US income tax purposes of $95.7 million and $26.2 million for other foreign jurisdictions’ tax purposes.

Harry Winston Diamond Corporation | 2012 Annual Report 55

Notes to Consolidated FINANCIAL Statements

Note 15:
Interest-Bearing Loans and Borrowings

		2012			2011
Mining segment credit facilities	$	48,460		$	47,895
Mining segment promissory note		–			70,000
Harry Winston Inc. credit facilities		217,071			181,715
First mortgage on real property		6,342			7,048
Bank advances		27,850			22,902
Finance leases		–			171
Total interest-bearing loans and borrowings		299,723			329,731
Less current portion		(29,238	)		(94,215	)
	$	270,485		$	235,516

		Nominal
		interest			Carrying amount at		Face value at
	Currency	rate	Date of maturity		January 31, 2012		January 31, 2012	Borrower
Secured bank loan (b)(i)	US	3.75%	March 31, 2013	$	200.5 million	$	200.5 million	Harry Winston Inc.
Secured bank loan (b)(ii)	CHF	3.15%	April 22, 2013	$	3.8 million	$	3.8 million	Harry Winston S.A.
Secured bank loan (b)(ii)	CHF	3.55%	January 31, 2033	$	12.8 million	$	12.8 million	Harry Winston S.A.
Secured bank loan (a)(i)	US	4.60%	June 24, 2013	$	50.0 million	$	50.0 million	Harry Winston Diamond Corporation and
								Harry Winston Diamond Mines Ltd.
First mortgage on real property (a)(iii)	CDN	7.98%	September 1, 2018	$	6.3 million	$	6.3 million	6019838 Canada Inc.
Secured bank advance (d)	US	12.00%	Due on demand	$	4.3 million	$	4.3 million	Harry Winston Diamond (India) Private Limited
Secured bank advance (d)	YEN	2.50%	February 22, 2012	$	7.5 million	$	7.5 million	Harry Winston Japan, K.K.
Unsecured bank advance (d)	YEN	2.98%	February 27, 2012	$	7.0 million	$	7.0 million	Harry Winston Japan, K.K.
Unsecured bank advance (d)	YEN	2.98%	February 29, 2012	$	7.7 million	$	7.7 million	Harry Winston Japan, K.K.
Unsecured bank advance (d)	YEN	2.00%	October 31, 2012	$	1.3 million	$	1.3 million	Harry Winston Japan, K.K.

(a) Mining segment credit facilities

(i)	The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. The facility has an initial maturity date of June 24, 2013 with two one-year extensions at the Company’s option. There are no scheduled repayments required before maturity. The facility is available to the Company and Harry Winston Diamond Mines Ltd. for general corporate purposes. Borrowings bear an interest margin of 3.5% above the higher of LIBOR or lender cost of funds. The Company is required to comply with financial covenants at the mining segment level customary for a financing of this nature, with change in control provisions at the Company and Diavik Diamond Mines level. These provisions include consolidated minimum tangible net worth, maximum mining segment debt to equity ratio, maximum mining segment debt to EBITDA ratio and minimum interest coverage ratio. At January 31, 2012, the Company had $50.0 million outstanding on its mining segment senior secured revolving credit facility.
(ii)	On August 25, 2010, the Company issued a promissory note in the amount of $70.0 million, maturing on August 25, 2011, as part of the consideration for reacquiring its 9% indirect interest in the Diavik Joint Venture from Kinross. The note bears interest at a rate of 5% per annum and can be paid in cash. On August 25, 2011, the Company paid the $70.0 million promissory note plus accrued interest to Kinross from cash on hand.
(iii)	The Company’s first mortgage on real property has scheduled principal payments of approximately $0.2 million quarterly, and may be prepaid at any time.

(b) Luxury brand segment credit facilities

(i) Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0 million five-year revolving credit facility. 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 on March 31, 2013. The 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.

56 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

	The credit agreement contains affirmative and negative non-financial and financial covenants, which apply to the luxury brand segment. These provisions include consolidated minimum tangible net worth, minimum coverage of fixed charges, and leverage ratio limitations on capital expenditures and certain investments, including the restriction to advance funds to the parent company. 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 luxury brand segment’s business, assets, liabilities, consolidated financial position or consolidated results of operations constitutes an event of default under the agreement.
	The luxury brand segment has pledged 100% of Harry Winston Inc.’s common stock and 66 ⅔% of the common stock of its foreign subsidiaries to the bank to secure the loan. Inventory, accounts receivable and the trademark 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 pledged collateral was made.
	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 CHF 17.5 million ($18.9 million) used to finance the construction of the Company’s watch factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($3.8 million) loan and a CHF 14.0 million ($15.1 million) loan. The bank has a secured interest in the factory building.

(c) Required principal repayments

2013	$	29,239
2014		255,738
2015		1,515
2016		1,587
2017		1,664
Thereafter		11,522

(d)	Bank advances
	The Company has available a $45.0 million (utilization in either US dollars or Euros) revolving financing facility for inventory and receivables funding in connection with marketing activities through its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond (India) Private Limited. Borrowings under the Belgian facility bear interest at the bank’s base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.0%. At January 31, 2012, $4.3 million was drawn under the Company’s revolving financing facility relating to Harry Winston Diamond (India) Private Limited and $nil was drawn by Harry Winston Diamond International N.V. The facility is guaranteed by Harry Winston Diamond Corporation.
	Harry Winston Japan, K.K., maintains unsecured credit agreements with three banks, each amounting to ¥1,250 million ($16.1 million). Harry Winston Japan, K.K., also maintains a secured credit agreement amounting to ¥575 million ($7.5 million). This facility is secured by inventory owned by Harry Winston Japan, K.K.

Note 16:
Provisions

(a) Future site restoration costs

		2012		2011
At February 1, 2011 and 2010	$	50,130	$	43,691
Revision of previous estimates		13,179		4,539
Accretion of provision		1,936		1,900
At January 31, 2012 and 2011	$	65,245	$	50,130

The Joint Venture has an obligation under various agreements (Note 22) to reclaim and restore the lands disturbed by its mining operations.

Harry Winston Diamond Corporation | 2012 Annual Report 57

Notes to Consolidated FINANCIAL Statements

	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, 2012 is estimated to be $84.7 million, of which approximately $23.7 million is expected to occur at the end of the mine life. The revision of previous estimates in fiscal 2012 is based on revised expectations of reclamation activity costs and changes in estimated reclamation timelines. The anticipated cash flows relating to the obligation at the time of the obligation have been discounted at an annualized rate of 1.5%.
(b)	Provisions for litigation claims
	By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. The Company is subject to various litigation actions, whose outcome could have an impact on the Company’s results should it be required to make payments to the plaintiffs. Legal advisors assess the potential outcome of the litigation and the Company establishes provisions for future disbursements as required. At January 31, 2012, the Company does not have any material provisions for litigation claims.

Note 17:
Share Capital

(a)	Authorized
	Unlimited common shares without par value.
(b)	Issued

	Number of shares		Amount
Balance, January 31, 2010	76,588,593	$	426,593
SHARES ISSUED FOR:
Issued to Kinross	7,142,857		69,737
Exercise of options	428,401		5,799
Balance, January 31, 2011	84,159,851		502,129
SHARES ISSUED FOR:
Exercise of options	714,930		5,846
Balance, January 31, 2012	84,874,781	$	507,975

(c)	Stock options
	Under the Employee Stock Option Plan, amended and approved by the shareholders on June 4, 2008, the Company may grant options for up to 6,000,000 shares of common stock. Options may be granted to any director, officer, employee or consultant of the Company or any of its affiliates. Options granted to directors vest immediately and options granted to officers, employees or consultants vest over three to four years. The maximum term of an option is ten years. The number of shares reserved for issuance to any one optionee pursuant to options cannot exceed 2% of the issued and outstanding common shares of the Company at the date of grant of such options.
	The exercise price of each option cannot be less than the fair market value of the shares on the last trading day preceding the date of 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.

58 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Compensation expense for stock options was $2.1 million for fiscal 2012 (2011 – $1.3 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 (2012 – $0.6 million; 2011 – $2.8 million).

Changes in share options outstanding are as follows:

						2012						2011
						Weighted average						Weighted average
	Options					exercise price	Options					exercise price
	000s			CDN $		US $	000s			CDN $		US $
Outstanding, beginning of year	2,868		$	12.58	$	12.26	3,234		$	12.89	$	7.61
Granted	350			16.70		17.44	300			12.35		11.78
Exercised	(715	)		7.26		7.43	(428	)		7.14		6.92
Expired	(102	)		25.54		26.14	(238	)		26.34		25.79
Outstanding, end of year	2,401		$	14.21	$	14.34	2,868		$	12.58	$	12.26

Exercisable options totaled 1.9 million at January 31, 2012 (2.2 million at January 31, 2011).

The following summarizes information about stock options outstanding at January 31, 2012:

	Options outstanding				Options exercisable
		Weighted
		average
		remaining		Weighted			Weighted
	Number	contractual		average	Number		average
Range of exercise prices	outstanding	life in years		exercise price	exercisable		exercise price
CDN $	000s			CDN $	000s		CDN $
$3.78	1,015	7.2	$	3.78	1,016	$	3.78
12.35–16.70	650	6.8		14.69	100		12.35
23.35–29.25	600	0.6		25.21	600		25.21
41.45	136	2.2		41.45	136		41.45
	2,401		$	14.21	1,852	$	13.94

Harry Winston Diamond Corporation | 2012 Annual Report 59

Notes to Consolidated FINANCIAL Statements

(d)	Stock-based compensation
	The Company applies the fair value method to all grants of stock options.
	The fair value of options granted during the years ended January 31, 2012 and 2011 was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:

		2012		2011
Risk-free interest rate		2.41%		2.13%
Dividend yield		0.00%		0.00%
Volatility factor		50.00%		50.00%
Expected life of the options		3.5 years		5.9 years
Average fair value per option, CDN	$	6.51	$	5.90
Average fair value per option, US	$	6.80	$	5.63

Expected volatility is estimated by considering historic average share price volatility based on the average expected life of the options.

(e) RSU and DSU Plans

RSU	Number of units
Balance, January 31, 2010	45,880
Awards and payouts during the year (net)
RSU awards	145,880
RSU payouts	(35,814	)
Balance, January 31, 2011	155,946
Awards and payouts during the year (net)
RSU awards	66,991
RSU payouts	(46,963	)
Balance, January 31, 2012	175,974

DSU	Number of units
Balance, January 31, 2010	159,475
Awards and payouts during the year (net)
DSU awards	33,739
DSU payouts	–
Balance, January 31, 2011	193,214
Awards and payouts during the year (net)
DSU awards	38,781
DSU payouts	(17,127	)
Balance, January 31, 2012	214,868

During the fiscal year, the Company granted 66,931 RSUs (net of forfeitures) and 38,781 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 Directors approval. The RSUs granted vest one-third on March 31 and one-third on each anniversary thereafter. The vesting of grants of RSUs is subject to special rules for a change in control, death and disability. The Company shall pay out cash on the respective vesting dates of RSUs and redemption dates of 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 fair value. This expense is recognized on a straight-line basis over each vesting period. The Company recognized an expense of $2.2 million (2011 – $0.9 million) for the year ended January 31, 2012. The total carrying amount of liabilities for cash settled share-based payment arrangements is $3.7 million (2011 – $2.5 million). The amounts for obligations and expense (recovery) for cash settled share-based payment arrangements have been grouped with Employee Benefit Plans in Note 13 for presentation purposes.

60 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Note 18:
Segmented Information
The Company operates in three segments within the diamond industry – mining, luxury brand and corporate, for the years ended January 31, 2012 and 2011.

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

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

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

For the year ended January 31, 2012		Mining			Luxury brand			Corporate			Total
Sales
North America	$	15,018		$	133,024		$	–		$	148,042
Europe		231,722			94,309			–			326,031
Asia excluding Japan		43,374			103,815			–			147,189
Japan		–			80,781			–			80,781
Total sales		290,114			411,929			–			702,043
Cost of sales
Depreciation and amortization		76,052			262			–			76,314
All other costs		151,899			223,611			136			375,646
Total cost of sales		227,951			223,873			136			451,960
Gross margin		62,163			188,056			(136	)		250,083
Gross margin (%)		21.4%			45.7%			–%			35.6%
Selling, general and administrative expenses
Selling and related expenses		3,412			129,445			–			132,857
Administrative expenses		10,042			39,166			11,487			60,695
Total selling, general and administrative expenses		13,454			168,611			11,487			193,552
Operating profit (loss)		48,709			19,445			(11,623	)		56,531
Finance expenses		(10,787	)		(5,900	)		–			(16,687	)
Exploration costs		(1, 770	)		–			–			(1, 770	)
Finance and other income		462			124			–			586
Foreign exchange gain		834			171			–			1,005
Segmented profit (loss) before income taxes	$	37,448		$	13,840		$	(11,623	)	$	39,665
Segmented assets as at January 31, 2012
Canada	$	936,723		$	–		$	–		$	936,723
United States		–			347,430			116,076			463,506
Other foreign countries		19,759			210,948			–			230,707
	$	956,482		$	558,378		$	116,076		$	1,630,936
Capital expenditures	$	45,165		$	19,681		$	–		$	64,846
Other significant non-cash items:
Deferred income tax expense (recovery)	$	(2,291	)	$	1,486		$	(283	)	$	(1,088	)

Operating profit (loss) for the year ended January 31, 2012 includes the following items of expense:

		Mining		Luxury Brand		Corporate		Total
Research and development	$	4,147	$	2,412	$	–	$	6,559
Operating lease		317		30,269		–		30,586
Employee compensation expense		43,500		68,782		4,089		116,371
Depreciation and amortization		78,760		12,321		558		91,639

Harry Winston Diamond Corporation | 2012 Annual Report 61

Notes to Consolidated FINANCIAL Statements

For the year ended January 31, 2011		Mining			Luxury brand			Corporate			Total
Sales
North America	$	10,418		$	108,500		$	–		$	118,918
Europe		247,677			78,624			–			326,301
Asia excluding Japan		21,059			92,504			–			113,563
Japan		–			65,181			–			65,181
Total sales		279,154			344,809			–			623,963
Cost of sales
Depreciation and amortization		60,923			320			–			61,243
All other costs		144,489			181,729			204			326,422
Total cost of sales		205,412			182,049			204			387,665
Gross margin		73,742			162,760			(204	)		236,298
Gross margin (%)		26.4%			47.2%			–%			37.9%
Selling, general and administrative expenses
Selling and related expenses		2,786			106,498			–			109,284
Administrative expenses		8,692			41,358			8,616			58,666
Total selling, general and administrative expenses		11,478			147,856			8,616			167,950
Operating profit (loss)		62,264			14,904			(8,820	)		68,348
Finance expenses		(7,136	)		(6,291	)		–			(13,427	)
Exploration costs		(666	)		–			–			(666	)
Finance and other income		280			389			–			669
Foreign exchange gain (loss)		(1,644	)		2,001			–			357
Segmented profit (loss) before income taxes	$	53,098		$	11,003		$	(8,820	)	$	55,281
Segmented assets as at January 31, 2011
Canada	$	954,072		$	–		$	–		$	954,072
United States		–			331,138			106,767			437,905
Other foreign countries		25,413			186,185			–			211,598
	$	979,485		$	517,323		$	106,767		$	1,603,575
Capital expenditures	$	41,859		$	6,751		$	–		$	48,610
Other significant non-cash items:
Deferred income tax expense (recovery)	$	12,380		$	5,060		$	(623	)	$	16,817

Operating profit (loss) for the year ended January 31, 2011 includes the following items of expense:

		Mining		Luxury Brand		Corporate		Total
Research and development	$	5,165	$	1,719	$	–	$	6,884
Operating lease		317		21,244		–		21,561
Employee compensation expense		38,557		58,786		3,334		100,677
Depreciation and amortization		63,424		12,264		1,319		77,007

Note 19:
Earnings per Share
The following table presents the calculation of diluted earnings per share:

		2012		2011
NUMERATOR
Net earnings for the year attributable to shareholders	$	25,454	$	41,530
DENOMINATOR (000s SHARES)
Weighted average number of shares outstanding		84,661		79,858
Dilutive effect of employee stock options		871		1,083
		85,532		80,941

62 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Note 20:
Related Party Disclosure

(a)	Operational information
	The Company had the following investments in significant subsidiaries at January 31, 2012:

Name of company	Effective interest	Country of incorporation
Harry Winston Diamond Mines Ltd.	100%	Canada
Harry Winston Diamond Limited Partnership	100%	Canada
Harry Winston Diamond (India) Private Limited	100%	India
Harry Winston Diamond International N.V.	100%	Belgium
Harry Winston Technical Services Inc.	100%	Canada
6019838 Canada Inc.	100%	Canada
Harry Winston Inc.	100%	US
Harry Winston SARL	100%	France
Harry Winston Japan, K.K.	100%	Japan
Harry Winston (UK) Limited	100%	UK
Harry Winston Inc. Taiwan Branch	100%	Taiwan
Harry Winston S.A.	100%	Switzerland
Harry Winston (Hong Kong) Limited	100%	Hong Kong
Harry Winston Commercial (Beijing) Co., Ltd	100%	China
Harry Winston N.A. Pte Ltd.	100%	Singapore

(b)	Compensation of key management personnel
	Key management includes: Chief Executive Officer
	Group Chief Financial Officer
	President and Chief Executive Officer, Harry Winston Inc. Executive Vice President, Buying and Sourcing Executive Vice President

		2012		2011
Short-term employee benefits	$	4,977	$	5,385
Share-based expenses		3,474		2,898
	$	8,451	$	8,283

Note 21:
Reclassifications
Certain comparative figures have been reclassified to conform with the current year’s presentation.

Note 22:
Commitments and Guarantees

(a)	Environmental agreements
	Through negotiations of environmental and other agreements, the Joint Venture must provide funding for the Environmental Monitoring Advisory Board. HWDLP anticipates its share of this funding requirement will be approximately $0.3 million for calendar 2012. Further funding will be required in future years; however, specific amounts have not yet been determined. These agreements also state that the Joint Venture must provide security deposits for the performance by the Joint Venture of its reclamation and abandonment obligations under all environmental laws and regulations. HWDLP’s share of the letters of credit outstanding posted by the operator of the Joint Venture with respect to the environmental agreements as at January 31, 2012, was $81.1 million. The agreement specifically provides that these funding requirements will be reduced by amounts incurred by the Joint Venture on reclamation and abandonment activities.
(b)	Participation agreements
	The Joint Venture has signed participation agreements with various native groups. These agreements are expected to contribute to the social, economic and cultural well-being of the Aboriginal bands. The agreements are each for an initial term of twelve years and shall be automatically renewed on terms to be agreed upon for successive periods of six years thereafter until termination. The agreements terminate in the event that the mine permanently ceases to operate. Harry Winston Diamond Corporation’s share of the Joint Venture’s participation agreements as at January 31, 2012 was $1.5 million.

Harry Winston Diamond Corporation | 2012 Annual Report 63

Notes to Consolidated FINANCIAL Statements

(c)

Operating lease commitments

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

		2012		2011
Within one year	$	22,439	$	18,720
After one year but not more than five years		75,285		49,973
More than five years		122,628		35,856
	$	220,352	$	104,549

(d)

Capital commitments related to the Joint Venture

At January 31, 2012, Harry Winston Diamond Corporation’s share of approved capital expenditures at the Joint Venture was $23.4 million (2011 – $14.6 million). At January 31, 2012, Harry Winston Diamond Corporation’s current projected share of the planned capital expenditures at the Diavik Diamond Mine for the calendar years 2012 to 2016, is approximately $140 million (2011 – $170 million) assuming a Canadian/US average exchange rate of $1.00 for the five years (2011 – $1.00).

Note 23:
Financial Risk Management Objectives and Policies
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 predominantly 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 profit arises from the following sources:
		Net Canadian dollar denominated monetary assets and liabilities –The Company’s functional and reporting currency is US dollars; however, many of the mining segment’s monetary assets and liabilities are in Canadian dollars. 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 assets and liabilities.
		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, 2012, a one-cent change in the exchange rate would have impacted pre-tax profit for the year by $0.5 million (2011 – $0.2 million).
	The Company also has foreign exchange exposure impacting accumulated other comprehensive income arising from assets recorded in currencies other than the US dollar at its luxury brand salons and watch factory. A one percent change in these underlying currencies at January 31, 2012 would have impacted accumulated other comprehensive income by $0.5 million.

64 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(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, 2012, a 100 basis point change in LIBOR would have impacted pre-tax net profit for the year by $2.3 million (2011 – $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 luxury brand 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 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.
	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, 2012, the Company’s maximum counterparty credit exposure consists of the carrying amount of cash and cash equivalents and accounts receivable, which approximates fair value.

The Company considers any accounts receivables outstanding more than 30 days to be past due. At January 31, 2012, past due accounts receivable were as follows:

		2012		2011
31– 60 days	$	4,651	$	531
61 – 90 days		1,692		338
Over 90 days		2,115		10,329
	$	8,458	$	11,198

(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-term 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. The Company assesses liquidity and capital resources on a consolidated basis. Management forecasts cash flows for its current and subsequent fiscal years to predict future financing requirements. Future financing requirements are met through a combination of committed credit facilities and access to capital markets.
	At January 31, 2012, the Company had $78.2 million of cash and cash equivalents and $116.0 million available under credit facilities.
	The following table summarizes the aggregate amount of contractual undiscounted future cash outflows for the Company’s financial liabilities:

				Less than		Year		Year		After
		Total		1 year		2–3		4–5		5 years
Trade and other payables	$	104,681	$	104,681	$	–	$	–	$	–
Income taxes payable		29,450		29,450		–		–		–
Interest-bearing loans and borrowings(a)		321,751		39,578		260,954		4,852		16,367
Environmental and participation agreement incremental commitments		93,330		82,676		4,844		–		5,810
Operating lease obligations		220,352		22,439		39,288		35,997		122,628
(a) Includes projected interest payments on the current debt outstanding based on interest rates in effect at January 31, 2012.

Harry Winston Diamond Corporation | 2012 Annual Report 65

Notes to Consolidated FINANCIAL Statements

(v)	Capital management
	The Company’s capital includes cash and cash equivalents, current and non-current interest-bearing loans and borrowings and equity, which includes issued common shares, contributed surplus and retained earnings.
	The Company’s primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations, to provide returns to shareholders and benefits for other stakeholders, and to pursue growth opportunities. To meet these needs, the Company may from time to time raise additional funds through borrowing and/or the issuance of equity or debt or by securing strategic partners, upon approval by the Board of Directors. The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on acquisitions or other major investments or divestitures, as well as annual capital and operating budgets.
	The Company assesses liquidity and capital resources on a consolidated basis. The Company’s requirements are for cash operating expenses, working capital, contractual debt requirements and capital expenditures. The Company believes that it will generate sufficient liquidity to meet its anticipated requirements for the next twelve months.

Note 24:
Financial Instruments
The Company has various financial instruments comprising cash and cash equivalents, accounts receivable, trade and other payables, and interest-bearing loans and borrowings.

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, which are designated as held-for-trading, are carried at fair value based on quoted market prices and are classified within Level 1 of the fair value hierarchy established by the International Accounting Standards Board.

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 interest-bearing loans and borrowings are for the most part fully secured; hence the fair values of these instruments at January 31, 2012 are considered to approximate their carrying value.

The carrying values and estimated fair values of these financial instruments are as follows:

		January 31, 2012				January 31, 2011
		Estimated		Carrying		Estimated		Carrying
		fair value		value		fair value		value
Financial assets
Cash and cash equivalents	$	78,116	$	78,116	$	108,693	$	108,693
Accounts receivable		26,910		26,910		22,788		22,788
	$	105,026	$	105,026	$	131,481	$	131,481
Financial liabilities
Trade and other payables	$	104,681	$	104,681	$	139,551	$	139,551
Promissory note		–		–		70,000		70,000
Interest-bearing loans and borrowings		299,723		299,723		259,731		259,731
	$	404,404	$	404,404	$	469,282	$	469,282

66 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

Note 25:
Explanation of Transition to IFRS
As stated in Note 2(a), these are the Company’s first audited consolidated financial statements prepared in accordance with IFRS.

The preparation of these first consolidated financial statements in accordance with IFRS has resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under generally accepted accounting principles in Canada (“Canadian GAAP”). Canadian GAAP differs in some areas from IFRS. IFRS 1, “First-time Adoption of International Financial Reporting Standards”, generally requires full retrospective application of the standards and interpretations in force assuming that the IFRS accounting policies had always been applied. However, IFRS 1 allows certain exemptions in the application of particular standards to prior periods in order to assist companies with the transition process. The Company has elected to take the following significant optional exemptions as permitted under IFRS 1 in preparing its opening IFRS balance sheet.

Business Combinations – IFRS 1 allows the Company not to apply IFRS 3, “Business Combinations” (“IFRS 3 (Revised)”), retrospectively to past acquisitions.

Leases – The Company has utilized this exemption, which allows an entity not to have to reassess contracts that have already been assessed under Canadian GAAP, and which would have resulted in a similar conclusion as International Financial Reporting Interpretations Committee (“IFRIC”) 4, “Determining Whether an Arrangement Contains a Lease”.

Cumulative Translation Differences – Retrospective application of IFRS would require the Company to determine cumulative currency translation differences in accordance with IAS 21, “The Effects of Changes in Foreign Exchange Rates” (“IAS 21”), from the date a subsidiary or associate was formed or acquired. This exemption permits the Company to reset existing cumulative translation differences to zero at transition date.

Borrowing Costs – This exemption allows the Company to adopt IAS 23, “Borrowing Costs” (“IAS 23”), which requires the capitalization of borrowing costs on all qualifying assets, prospectively from the date of the opening IFRS balance sheet. The alternative to this exemption requires the Company to retrospectively restate borrowing costs in accordance with IFRS requirements, in addition to capitalizing borrowing costs from the date of transition.

Decommissioning Liabilities Included in the Cost of Property, Plant and Equipment – IFRS 1 provides an optional exemption from the full retrospective application of decommissioning liabilities, which allows an entity to re-measure provisions on the transition date under IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” (“IAS 37”), and estimate the amount to be included in the cost of the related asset by discounting the liability to the date at which it first arose. The alternative to this election, retrospective application, would require the Company to estimate its provision for reclamation and remediation at the original date incurred and reflect changes in estimate and discount rates through to the date of transition to IFRS.

The accounting policies described in Note 3 of the audited consolidated financial statements have been applied in preparing: the financial statements for the year ended January 31, 2012, the comparative information presented in these financial statements for both the year ended January 31, 2011, and in the preparation of an opening IFRS balance sheet at February 1, 2010 (the Company’s date of transition).

An explanation of how the transition to IFRS has affected the reported financial position and financial performance of the Company is shown below, including reconciliations of equity, profit and loss and comprehensive income for the comparative periods and of equity at the date of transition reported under previous Canadian GAAP to those reported for those periods and at the date of transition under IFRS.

Harry Winston Diamond Corporation | 2012 Annual Report 67

Notes to Consolidated FINANCIAL Statements

Explanation of transition to IFRS: Reconciliation of equity

(in thousands of United States dollars)			February 1, 2010								January 31, 2011
					Effect of								Effect of
			Canadian		transition						Canadian		transition
	Ref.		GAAP		to IFRS			IFRS			GAAP		to IFRS			IFRS
ASSETS
Current assets:
Cash and cash equivalents		$	62,969	$	–		$	62,969		$	108,693	$	–		$	108,693
Accounts receivable	(a)		23,520		78			23,598			22,723		65			22,788
Inventory and supplies			311,188		–			311,188			403,212		–			403,212
Other current assets	(b)		44,220		(4,921	)		39,299			45,681		(4,364	)		41,317
			441,897		(4,843	)		437,054			580,309		(4,299	)		576,010
Property, plant and equipment
– Mining	(c)		802,984		(19,552	)		783,432			777,807		(13,714	)		764,093
Property, plant and equipment
– Luxury brand			62,277		–			62,277			61,019		–			61,019
Intangible assets, net			129,213		–			129,213			127,894		–			127,894
Other non-current assets	(a)		15,629		–			15,629			16,626		(2,105	)		14,521
Deferred income tax assets	(a)		42,805		7,719			50,524			53,857		6,181			60,038
Total assets		$	1,494,805	$	(16,676	)	$	1,478,129		$	1,617,512	$	(13,937	)	$	1,603,575
LIABILITIES AND EQUITY
Current liabilities:
Trade and other payables	(d)	$	87,448	$	(11,555	)	$	75,893		$	142,339	$	(2,788	)	$	139,551
Employee benefit plans	(d)		–		11,284			11,284			–		4,317			4,317
Income taxes payable			46,297		–			46,297			6,660		–			6,660
Bank advances	(d)		22,485		(22,485	)		–			22,902		(22,902	)		–
Promissory note			–		–			–			70,000		–			70,000
Current portion of interest- bearing loans    and borrowings	(d)		1,154		22,677			23,831			1,313		22,902			24,215
			157,384		(79	)		157,305			243,214		1,529			244,743
Interest-bearing loans and borrowings	(d)		161,538		153			161,691			237,450		(1,934	)		235,516
Employee benefit plans	(e)		2,201		4,697			6,898			3,001		4,286			7,287
Provisions	(f)		41,275		2,416			43,691			43,390		6,740			50,130
Deferred income tax liabilities	(g)		271,822		(25,424	)		246,398			355,531		(45,663	)		309,868
Total liabilities			634,220		(18,237	)		615,983			882,586		(35,042	)		847,544
Equity:
Share capital			426,593		–			426,593			502,129		–			502,129
Contributed surplus			17,730		–			17,730			16,233		–			16,233
Retained earnings	(h)		210,001		32,056			242,057			176,620		53,159			229,779
Accumulated other comprehensive income	(i)		28,445		(31,016	)		(2,571	)		39,678		(32,054	)		7,624
Total shareholders’ equity			682,769		1,040			683,809			734,660		21,105			755,765
Non-controlling interest	(j)		177,816		521			178,337			266		–			266
Total equity			860,585		1,561			862,146			734,926		21,105			756,031
Total liabilities and equity		$	1,494,805	$	(16,676	)	$	1,478,129		$	1,617,512	$	(13,937	)	$	1,603,575

68 Harry Winston Diamond Corporation | 2012 Annual Report

 

Notes to Consolidated FINANCIAL Statements

Explanation of transition to IFRS: Reconciliation of profit

(in thousands of United States dollars)			For the fiscal year ended January 31, 2011
			Canadian			Effect of
			GAAP			transition to			IFRS
	Ref.					IFRS
Sales		$	623,963		$	–		$	623,963
Cost of sales	(k)		391,562			(3,897	)		387,665
Gross margin			232,401			3,897			236,298
Selling, general and administrative expenses			167,950			–			167,950
Operating profit			64,451			3,897			68,348
Finance expenses	(l)		(11,527	)		(1,900	)		(13,427	)
Exploration costs	(m)		–			(666	)		(666	)
Finance and other income	(m)		486			183			669
Foreign exchange gain (loss)	(n)		(14,406	)		14,763			357
Profit before income taxes			39,004			16,277			55,281
Current income tax recovery			(8,737	)		–			(8,737	)
Deferred income tax expense	(o)		21,121			(4,304	)		16,817
Net profit		$	26,620		$	20,581		$	47,201
Attributable to:
Shareholders		$	21,669		$	19,861		$	41,530
Non-controlling interest			4,951			720			5,671
Net profit		$	26,620		$	20,581		$	47,201
Earnings per share
Basic		$	0.27		$	0.25		$	0.52
Diluted		$	0.27		$	0.24		$	0.51
Weighted average number of shares outstanding			79,858,018			79,858,018			79,858,018

Explanation of transition to IFRS: Reconciliation of comprehensive income

(in thousands of United States dollars)			For the fiscal year ended January 31, 2011
					Effect of
			Canadian		transition to
	Ref.		GAAP		IFRS			IFRS
Net profit – as above		$	26,620	$	20,581		$	47,201
Other comprehensive income
Net gain (loss) on translation of net foreign operations			10,879		–			10,879
Change in fair value of derivative financial instruments			354		–			354
Actuarial loss on employee benefit plans	(e)(i)		–		(1,038	)		(1,038	)
Total comprehensive income		$	37,853	$	19,543		$	57,396
Attributable to:
Shareholders		$	32,902	$	18,823		$	51,725
Non-controlling interest			4,951		720			5,671
Total comprehensive income		$	37,853	$	19,543		$	57,396

Harry Winston Diamond Corporation | 2012 Annual Report 69

Notes to Consolidated FINANCIAL Statements

References to the Reconciliation of Equity and Profit

(a)	Reclassification of assets
	To conform to IFRS presentation requirements, certain asset balances have been reclassified.
(b)	Other current assets

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Reclassification of assets	See (a)	$	(7,797	)	$	(6,246	)
Deferred tax impact on intra-group transfer of assets	(i)		2,876			1,882
Net decrease in other current assets		$	(4,921	)	$	(4,364	)

(i)

Under IFRS, deferred taxes are recognized for the difference in tax bases between jurisdictions as a result of an intra-group transfer of assets. The deferred tax component under IFRS is computed using the tax rate applicable to the purchaser, whereas the seller’s tax rate was applied under Canadian GAAP. On transition to IFRS at February 1, 2010, deferred income tax asset increased by $2.9 million along with a corresponding increase in retained earnings.

For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in a reduction of $1.0 million in both deferred income tax asset and deferred income tax recovery.

(c) Property, plant and equipment – Mining

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Derecognition of exploration costs capitalized	(i)	$	(18,632	)	$	(17,072	)
Remeasurement of the asset retirement obligation	See (f)(i)		(920	)		3,358
Net decrease in property, plant and equipment – Mining		$	(19,552	)	$	(13,714	)

(i)

Under Canadian GAAP, the Company’s policy on exploration expenditures incurred is to capitalize and to amortize using the units-of- production method. For IFRS purposes, the Company’s accounting policy on exploration expenditures is to expense unless the exploration activity relates to proven and probable reserves. The retrospective application of this new accounting policy at the date of transition has resulted in the $18.6 million write-off of the net book value of capitalized exploration costs, and a decrease in deferred income tax liability, non-controlling interest and retained earnings by $5.5 million, $0.9 million and $12.2 million, respectively.

For the fiscal year ended January 31, 2011, the accounting under IFRS increased mining property, plant and equipment, deferred income tax liabilities and non-controlling interest by $1.6 million, $0.6 million and $0.2 million, respectively. Cost of sales decreased by $2.0 million, and exploration costs, deferred income tax expense and profit attributable to non-controlling interest increased by $0.5 million, $0.6 million and $0.2 million, respectively.

(d)	Reclassification of liabilities
	To conform to IFRS presentation requirements, various liability balances have been reclassified.

70 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(e) Employee benefit plans

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Retrospective application of IAS 19, “Employee Benefits”	(i)	$	4,771		$	5,986
Reclassification of liabilities	See (d)		(74	)		(1,700	)
Net increase in employee benefit plans		$	4,697		$	4,286

(i)

Under Canadian GAAP, actuarial gains or losses for defined benefit plans that exceeded the corridor threshold (10% of the greater of the obligation and fair value of plan assets at the beginning of the period) were recognized over the remaining average service life of active employees. For IFRS purposes, the Company’s accounting policy is to recognize its actuarial gains and losses immediately in other comprehensive income, and has retrospectively applied this approach at the date of transition. As a result, $2.2 million in previously unrecognized cumulative actuarial losses at February 1, 2010 were recognized in accumulated other comprehensive income within equity, along with a $4.8 million increase in the defined benefit plan obligation and a $2.6 million decrease in deferred income tax liabilities.

For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in a $1.2 million increase to the defined benefit plan obligation, a $1.0 million charge to other comprehensive income, and a $0.2 million decrease in deferred income tax liabilities.

(f) Provisions

					Twelve months ended
	Ref.		February 1, 2010		January 31, 2011
Remeasurement of the asset retirement obligation	(i)	$	2,416	$	6,740

(i)

The Company has elected to utilize the IFRS 1 optional exemption relating to “Changes in decommissioning, restoration and similar liabilities” in preparing its opening balance sheet under IFRS. Through application of this IFRS exemption, the site restoration provision under Canadian GAAP has been increased by $2.4 million along with reductions in mining capital assets, deferred income tax liability, non-controlling interest and retained earnings by $0.9 million, $1.0 million, $0.2 million and $2.2 million, respectively.

For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in increases of $4.3 million in both mining capital assets and restoration site provision. Nominal changes were also made to deferred income tax liabilities, cost of sales, finance expenses and deferred income tax recovery.

(g) Deferred income tax liabilities

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Recognition of new deferred tax balances	(i)	$	(16,363	)	$	(34,749	)
Derecognition of exploration costs capitalized	See (c)(i)		(5,521	)		(4,887	)
Retrospective application of IAS 19, “Employee Benefits”	See (e)(i)		(2,555	)		(2,732	)
Remeasurement of the asset retirement obligation	See (f)(i)		(985	)		(1,002	)
Revaluation of deferred income tax liabilities	(ii)		–			(2,293	)
Total decrease in deferred income tax liabilities		$	(25,424	)	$	(45,663	)

(i)

Under IFRS, in the determination of temporary differences, the carrying value of non-monetary assets and liabilities is translated into the functional currency at the historical rate and compared to its tax value translated into the functional currency at the current rate. The resulting temporary difference (measured in the functional currency) is then multiplied by the appropriate tax rate to determine the related deferred tax balance.

Under Canadian GAAP, in the determination of temporary differences related to non-monetary assets and liabilities, the temporary differences computed in local currency are multiplied by the appropriate tax rate. The resulting future income tax amount is then translated into the Company’s functional currency if it is different from the local currency.

Harry Winston Diamond Corporation | 2012 Annual Report 71

Notes to Consolidated FINANCIAL Statements

	On transition, the accounting under IFRS related to the determination of temporary differences of foreign currency non-monetary assets and liabilities and other temporary differences that were treated as permanent under Canadian GAAP has reduced deferred tax liability by $24.4 million and increased retained earnings and non-controlling interest by $22.8 million and $1.6 million, respectively.
	In addition, upon finalizing the IFRS adjustments, the Company recorded an additional deferred tax liability of $8.0 million, with a corresponding impact on retained earnings related to immaterial adjustments of prior period balances, which were not previously recorded in the April 30, 2011 unaudited interim condensed consolidated financial statements. The Company has determined that these amounts were not material to its consolidated financial statements for any prior interim or annual periods.
	For the fiscal year ended January 31, 2011, the accounting under IFRS resulted in an $18.4 million decrease in deferred income tax liabilities and an $18.4 million increase in deferred income tax recovery. Net profit attributable to non-controlling interest also increased by $0.5 million.
(ii)	For the fiscal year ended January 31, 2011, the above IFRS adjustments to deferred income tax liabilities required a revaluation of the account balance resulting in a $2.3 million reduction in deferred income tax liabilities and a corresponding increase in deferred income tax recovery. Nominal changes were also made to non-controlling interest.

(h)	Retained earnings
	The effect of all IFRS adjustments has increased (decreased) retained earnings as follows:

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Reset of cumulative translation differences	See (i)(i)	$	28,800		$	28,800
Recognition of new deferred tax balances	See (g)(i)		14,775			32,692
Derecognition of exploration costs capitalized	See (c)(i)		(12,243	)		(11,496	)
Deferred tax impact on intra-group transfer of assets	See (b)(i)		2,876			1,882
Remeasurement of the asset retirement obligation	See (f)(i)		(2,152	)		(2,181	)
Revaluation of deferred income tax liabilities	See (g)(ii)		–			2,221
Reacquisition of partnership units	See (i)(i)		–			1,241
Net increase in retained earnings		$	32,056		$	53,159

(i) Accumulated other comprehensive income

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Reset of cumulative translation differences	(i)	$	(28,800	)	$	(28,800	)
Retrospective application of IAS 19, “Employee Benefits”	See (e)(i)		(2,216	)		(3,254	)
Total decrease in accumulated other comprehensive income		$	(31,016	)	$	(32,054	)

(i) The Company has elected to utilize the IFRS 1 optional exemption relating to “Cumulative translation differences” in preparing its opening balance sheet under IFRS. Through application of this exemption on transition date, existing cumulative translation differences have been reset to zero and retained earnings has been increased by $28.8 million.

72 Harry Winston Diamond Corporation | 2012 Annual Report

Notes to Consolidated FINANCIAL Statements

(j) Non-controlling interest

						Twelve months ended
	Ref.		February 1, 2010			January 31, 2011
Derecognition of exploration costs capitalized	See (c)(i)	$	(868	)	$	(689	)
Remeasurement of the asset retirement obligation	See (f)(i)		(199	)		(199	)
Recognition of new deferred tax balances	See (g)(i)		1,588			2,057
Revaluation of deferred income tax liabilities	See (g)(ii)		–			72
Reacquisition of partnership units	(i)		–			(1,241	)
Net change in non-controlling interest		$	521		$	–

(i)	During the third quarter of fiscal 2011, the Company reacquired its 9% indirect interest in the Diavik Joint Venture from Kinross resulting in the reversal of previously recorded profit adjustments attributable to non-controlling interest.
	For the fiscal year ended January 31, 2011, IFRS adjustments resulted in an increase in non-controlling interest of $0.7 million.

(k) Cost of sales

			Twelve months ended
	Ref.		January 31, 2011
Reclassification of accretion expense	(i)	$	(2,004	)
Derecognition of exploration costs capitalized	See (c)(i)		(2,043	)
Remeasurement of the asset retirement obligation	See (f)(i)		150
Net decrease in cost of sales		$	(3,897	)

(i) In accordance with IFRIC 1, “Changes in Existing Decommissioning, Restoration and Similar Liabilities”, accretion expense is treated as interest expense whereas under Canadian GAAP it had been recorded as a component of cost of sales.

(l) Finance expenses

			Twelve months ended
	Ref.		January 31, 2011
Reclassification of accretion expense	See (k)(i)	$	(2,004	)
Remeasurement of the asset retirement obligation	See (f)(i)		104
Net increase in finance expenses		$	(1,900	)

(m) Exploration costs

			Twelve months ended
	Ref.		January 31, 2011
Derecognition of exploration costs capitalized	See (c)(i)	$	(483	)
Reclassification of exploration costs	See (m)		(183	)
Increase in exploration costs		$	(666	)

Harry Winston Diamond Corporation | 2012 Annual Report 73

Notes to Consolidated FINANCIAL Statements

(n) Decrease in foreign exchange loss

			Twelve months ended
	Ref.		January 31, 2011
Reclassification of foreign exchange loss	(i)	$	14,763

(i) Under Canadian GAAP, the foreign exchange difference from the translation of deferred taxes was presented within the foreign exchange gain/loss account. For IFRS reporting purposes, these foreign exchange differences have been reclassified to deferred income tax recovery/expense.

(o) Deferred income tax recovery

			Twelve months ended
	Ref.		January 31, 2011
Derecognition of exploration costs capitalized	See (c)(i)	$	634
Recognition of new deferred income tax liability balances	See (g)(i)		(18,385	)
Deferred tax impact on intra-group transfer of assets	See (b)(i)		994
Remeasurement of the asset retirement obligation	See (f)(i)		(17	)
Reclassification of foreign exchange loss	See (n)(i)		14,763
Revaluation of deferred income tax liabilities	See (g)(ii)		(2,293	)
Net increase in deferred income tax recovery		$	(4,304	)

74 Harry Winston Diamond Corporation | 2012 Annual Report

Diavik Diamond Mine Mineral Reserve and
Mineral Resource Statement

AS OF DECEMBER 31, 2011

Proven and Probable Reserves

	Proven			Probable			Proven and Probable
	Millions	Carats	Millions	Millions	Carats	Millions	Millions	Carats	Millions
Open pit and underground mining	of tonnes	per tonne	of carats	of tonnes	per tonne	of carats	of tonnes	per tonne	of carats
A-154 South
Open Pit	–	–	–	–	–	–	–	–	–
Underground	1.6	4.0	6.3	1.4	3.4	4.7	2.9	3.7	10.9
Total A-154 South	1.6	4.0	6.3	1.4	3.4	4.7	2.9	3.7	10.9
A-154 North
Open Pit	–	–	–	–	–	–	–	–	–
Underground	3.1	2.3	7.1	4.9	2.2	10.7	8.0	2.2	17.8
Total A-154 North	3.1	2.3	7.1	4.9	2.2	10.7	8.0	2.2	17.8
A-418
Open Pit	0.7	4.0	2.8	0.6	3.8	2.3	1.3	3.9	5.0
Underground	–	–	–	6.7	3.8	25.1	6.7	3.8	25.1
Total A-418	0.7	4.0	2.8	7.3	3.8	27.4	8.0	3.8	30.2
Total
Open Pit	0.7	4.0	2.8	0.6	3.8	2.3	1.3	3.9	5.0
Underground	4.7	2.8	13.3	12.9	3.1	40.5	17.6	3.1	53.8
Total Reserves	5.4	3.0	16.1	13.5	3.2	42.8	18.9	3.1	58.9

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
Kimberlite pipe	of tonnes	per tonne	of carats	of tonnes	per tonne	of carats	of tonnes	per tonne	of carats
A-154 South	–	–	–	–	–	–	0.04	3.5	0.1
A-154 North	–	–	–	–	–	–	2.2	2.4	5.3
A-418	–	–	–	–	–	–	0.3	2.7	0.8
A-21	3.6	2.8	10.0	0.4	2.6	1.0	0.8	3.0	2.3
Total	3.6	2.8	10.0	0.4	2.6	1.0	3.3	2.6	8.5

Note: Totals may not add up due to rounding.

Cautionary Note to United States Investors Concerning Disclosure of Mineral Reserves and Resources: The Company is organized under the laws of Canada. The mineral reserves and resources described herein are estimates, and have been prepared in compliance with NI 43-101. The definitions of proven and probable reserves used in NI-43-101 differ from the definitions in the United States Securities and Exchange Commission (“SEC”) Industry Guide 7. In addition, the terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7, and normally are not permitted to be used in reports and registration statements filed with the SEC. Accordingly, information in this financial report containing descriptions of the Diavik Diamond Mine’s mineral deposits may not be comparable to similar information made public by US companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.

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.

Harry Winston Diamond Corporation | 2012 Annual Report 75

HARRY WINSTON RETAIL SALONS

United States	Europe	Asia
Bal Harbour	London	Beijing
Bal Harbour Shops	171 New Bond Street	Peninsula Beijing Palace Hotel
9700 Collins Avenue, Suite 151	London, England WIS-4RD	8 Goldfish Lane, Wangfujing
Bal Harbour, Florida 33154	Tel: 44.207.907.8800	Beijing, 100006
Tel: 786.206.6657		The People’s Republic of China
		Tel: 861.0.8511.5595
	Paris
Beverly Hills	29 Avenue Montaigne
310 North Rodeo Drive	75008 Paris, France	Hong Kong
Beverly Hills, California 90210	Tel: 33.1.4720.0309	The Peninsula Hotel
Tel: 310.271.8554		Shop E8, G/F
	Japan	Salisbury Road
	Nagoya	Tsimshatsui, Kowloon
Chicago	1-1-6 Higashisakura	Hong Kong
55 East Oak Street	Higashi-Ku	Tel: 852.2301.2131
Chicago, Illinois 60611	Nagoya, Japan 461-0005
Tel: 312.705.1820	Tel: 81.5.2950.5100
		Shanghai Peninsula
Costa Mesa	Osaka	The Peninsula Shanghai
3333 Bristol Street, Suite 2660	Shinsaibashi District	Shop L1U
Costa Mesa, California 92626	3-10-25, Minamisemba	No. 32 Zhongshan Dong
Tel: 714.371.1910	Chuo-Ku	Yi Road
	Osaka, Japan 542-0081	The People’s Republic of China
Dallas	Tel: 81.6.6281.8855	Tel: 0086.21.2310.6969
19 Highland Park Village
Dallas, Texas 75205	Tokyo – Ginza	Shanghai Xintiandi
Tel: 214.647.5830	1-8-14 Ginza, Chuo-Ku	No. 188 Tai Cang Road
	Tokyo, Japan 104-0061	Shanghai 200002
Honolulu	Tel: 81.3.3535.6441	The People’s Republic of China
Ala Moana Center		Tel: 0086.21.2310.6868
1450 Ala Moana Blvd, Suite 2094	Tokyo – Midtown
Honolulu, Hawaii 96814	Roppongi District	Singapore
Tel: 808.791.4000	9-7-3, Akasaka, Minato-Ku	ION Orchard
	Tokyo, Japan 107-0052	2 Orchard Turn
Las Vegas	Tel: 81.3.5413.3400	Singapore 238801
Crystals at CityCenter		Tel: 6883.9509
3720 Las Vegas Blvd South	Tokyo – Omotesando
Suite 262	Omotesando Hills	Taipei
Las Vegas, Nevada 89158	4-12-10, Jingumae Shibuya-ku	Regent Hotel
Tel: 702.262.0001	Tokyo, Japan 150-0001	2nd Floor, No 41, Sec 2
	Tel: 81.3.5785.0440	Chung Shan N Road
New York		104 Taipei, Taiwan
718 Fifth Avenue		Tel: 886.2.2521.7808
New York, New York 10019
Tel: 212.399.1000

Toll free number for United States:
1.800.988.4110

HARRY WINSTON LICENSED SALONS

Dubai (Emirates Towers)	Ukraine	Manila
The Boulevard, Emirates Towers	12/3 Gorodetskogo Str	Gound Fl. Greenbelt 5 Ayala Center
Dubai, UAE	01001 Kiev	Makati City
Tel: +971.4.330.0060	Tel: 38.044.278.74.72	Tel: +63.917.587.4037
Dubai Mall
The Dubai Mall
Dubai, UAE
Tel: +971.4.325.3334

76 Harry Winston Diamond Corporation | 2012 Annual Report

 

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	606 C Wing, Dharam Palace
Suite 760	101–103, N.S. Patkar Marg
62 Pelikaanstraat	Mumbai 400 007, India
Antwerp 2018, Belgium	Tel: +91.22.236.99004
Tel: +32.3.225.5315	Fax: +91.22.236.92299
Fax: +32.3.233.2165

BOARD OF DIRECTORS AND SENIOR MANAGEMENT

Board of Directors	Committees	Senior Management
Robert A . Gannicott	Audit Committee	Robert A . Gannicott
Chairman &	Noel Harwerth (Chair)	Chairman & Chief Executive Officer
Chief Executive Officer,	Matthew W. Barrett
Harry Winston Diamond Corporation	Daniel Jarvis	Frédéric de Narp
Director since June 1992	Jean-Marc Loubier	President & Chief Executive Officer,
		Harry Winston Inc.
Matthew W. Barrett	Human Resources &
Corporate Director	Compensation Committee	Cyrille Baudet
Director since January 2008	Micheline Bouchard (Chair)	Group Chief Financial Officer
	David Carey
Micheline Bouchard	Noel Harwerth	James R .W. Pounds
Corporate Director	Laurent E. Momméja	Executive Vice President,
Director since January 2008		Buying/Sourcing
	Nominating & Corporate
David Carey	Governance Committee	Raymond N . Simpson
President, Hearst Magazines	Daniel Jarvis (Chair)	Executive Vice President
Director since September 2010	Matthew W. Barrett
	Micheline Bouchard
Noel Harwerth	Laurent E. Momméja
Corporate Director
Director since June 2008

Daniel Jarvis

Vice Chair &

Chief Financial Officer,

Concert Properties Ltd.

Lead Director of the Board

Director since June 2008

Jean-Marc Loubier

Chief Executive Officer,

HKL Holdings

Director since December 2010

Laurent E . Momméja

Corporate Director

Director since June 2004

J. Roger B. Phillimore

Chairman of Lonmin plc

Director since November 1994

Corporate Secretary

Lyle R . Hepburn

BOARD OF DIRECTORS

From left to right: Matthew Barrett, Noel Harwerth, Daniel Jarvis, David Carey, Roger Phillimore, Robert Gannicott, Jean-Marc Loubier, Micheline Bouchard and Laurent Mommeja.

Harry Winston Diamond Corporation | 2012 Annual Report 77

SHAREHOLDER INFORMATION

Transfer Agents & Registrars	Auditors	Corporate Offices
Please direct inquiries concerning	KPMG LLP	Harry Winston Diamond Corporation
shares, share transfers, dividend	Chartered Accountants	P.O. Box 4569, Station A
payments and change of address	Suite 4600	Toronto, Ontario, Canada
to the Transfer Agent:	Bay Adelaide Centre	M5W 4T9
	333 Bay Street	Tel: 416.362.2237
CIBC Mellon Trust Company	Toronto, Ontario, Canada	Fax: 416.362.2230
c/o Canadian Stock Transfer	M5H 2S5	http://investor.harrywinston.com
Company Inc.
P.O. Box 700, Station B	Annual Meeting of Shareholders	Harry Winston Inc.
Montreal, Quebec, Canada H3B 3K3	Prince of Wales	Corporate Office
Toll free within Canada and	Northern Heritage Centre	1330 Avenue of the Americas
United States:	4750 48th Street	New York, New York 10019
1.800.387.0825	Yellowknife, NT, Canada	Tel: 212.315.7900
Tel: 416.682.3860	Wednesday, July 18, 2012	Fax: 212.581.2612
Fax: 1.888.249.6189	7:00 AM	www.harrywinston.com
e-mail: inquiries@canstockta.com
www.canstockta.com		Investor Relations Contact
		Laura Kiernan
Registrar and Transfer Company		Director, Investor Relations
10 Commerce Drive		Tel: 212.315.7934
Cranford, New Jersey 07016		e-mail: lkiernan@harrywinston.com
Toll free: 1.800.368.5948
Tel: 908.497.2300		Kelley Stamm
Fax: 908.497.2318		Manager, Investor Relations
e-mail: info@rtco.com		Tel: 416.205.4380
www.rtco.com		e-mail: kstamm@harrywinston.com

Harry Winston Diamond Corporation Stock Trading History
Toronto Stock Exchange: HW
New York Stock Exchange: HWD

	Feb. 1, 2011 to Jan. 31, 2012		Feb. 1, 2010 to Jan. 31, 2011
	TSX CDN$	NYSE US$	TSX CDN$	NYSE US$
High	17.82	18.23	14.95	14.72
Low	9.71	9.14	9.46	8.84
Close	11.73	11.70	10.83	10.79
Average daily volume	188,912	277,885	266,630	231,986

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 http://investor.harrywinston.com.

78 Harry Winston Diamond Corporation | 2012 Annual Report