Contact Us   Site Map   Downloads   FAQs   Alerts   Search
Print  Font  

Share

Harry Winston Diamond Corporation Reports Third Quarter Fiscal 2012 Results

TORONTO, Dec. 8, 2011, 2011 (Canada NewsWire via COMTEX) --

Harry Winston Diamond Corporation (TSX: HW, NYSE:HWD) (the "Company") today announced its third quarter Fiscal 2012 results for the period ending October 31, 2011.

Robert Gannicott, Chairman and Chief Executive Officer said, "Challenging trading conditions returned to the diamond business internationally in the third quarter. However, this was not the sudden, hard shock of 2008/2009 and, being better equipped to weather a downturn than in 2008/9, we elected not to sell the full rough diamond production into a weak market during the quarter but continued to supply the segments where demand remained resilient. We have now resumed a wider range of rough diamond sales as the market has recovered some poise in the light of continuing good consumer demand. Our luxury brand segment has seen increased unit sales as we continue to broaden the focus of our jewelry and timepieces."

Third Quarter Summary:

    --  The mining segment reported sales of $36.2 million, a 40%
        decrease from $60.7 million in the comparable quarter of the
        prior year.  Rough diamond production (the Company's 40% share)
        for the calendar quarter increased by 8% to 0.8 million carats
        compared to 0.7 million carats in the same quarter of the prior
        year.

    --  For the luxury brand segment, sales were $83.5 million compared
        to $80.2 million in the same quarter of the prior year, an
        increase of 4% or a decrease of 4% at constant exchange rates.

    --  The achieved rough diamond price during the third quarter was
        $159 per carat from 0.2 million carats sold compared to $95 per
        carat from 0.6 million carats sold in the comparable quarter of
        the prior year. The price difference is primarily the result of
        the stockpiling of some lower priced diamond assortments which
        currently face competition from the recent sale of stocks of
        similar quality Zimbabwe diamonds. At October 31, 2011, the
        Company was holding 1.1 million carats of rough diamond
        inventory with an estimated value of $123 million at current
        market prices.

    --  Mining segment EBITDA was $16.7 million in the quarter compared
        to $24.9 million in the comparable quarter of the prior year.
        After accounting for the $13.0 million ($8.4 million tax
        effected) non-cash de-recognition charge related to a backfill
        plant no longer needed in revised underground mining methods,
        this segment recorded an operating loss of $3.3 million.
        Excluding this charge, the mining segment would have recorded
        an operating profit of $9.7 million in the third quarter
        compared to $9.4 million in the same quarter of the prior year.

    --  The luxury brand segment generated EBITDA of $4.5 million and
        an operating profit of $1.3 million in the third quarter 2012
        compared to EBITDA of $8.6 million and operating profit of $5.4
        million in the comparable quarter of the prior year. The
        decreased operating profit is a result of the seasonal
        increased marketing expenditure leading into the holiday season
        and expenses related to the anticipated opening of new salons
        in China during early 2012.

    --  At October 31, 2011. the Company had $83.2 million of cash and
        $106.2 million availability in its credit facilities.


Fiscal 2012 Third Quarter Financial Summary

(US$ in millions except Earnings per Share amounts) (Prepared in accordance with IFRS)

 _____________________________________________________________________
|             |    Three   |    Three   | Nine months  | Nine months  |
|             |  months    |  months    |    ended     |    ended     |
|             |   ended    |   ended    | Oct 31, 2011 | Oct 31, 2010 |
|             |Oct 31, 2011|Oct 31, 2010|              |              |
|_____________|____________|____________|______________|______________|
|Sales        |    $119.7  |    $140.9  |      $486.0  |      $408.6  |
|-     Mining |     36.2   |     60.7   |      187.9   |      196.5   |
|Segment      |     83.5   |     80.2   |      298.1   |      212.1   |
|-     Luxury |            |            |              |              |
|Brand Segment|            |            |              |              |
|_____________|____________|____________|______________|______________|
|Operating    |     (2.0)  |      14.8  |       25.8   |       47.1   |
|profit (loss)|     (3.3)  |      9.4   |       13.6   |       38.0   |
|-     Mining |      1.3   |      5.4   |       12.2   |       9.1    |
|Segment      |            |            |              |              |
|-     Luxury |            |            |              |              |
|Brand Segment|            |            |              |              |
|_____________|____________|____________|______________|______________|
|Net profit   |     (4.7)  |      12.7  |        8.9   |       27.8   |
|attributable |            |            |              |              |
|to           |            |            |              |              |
|shareholders |            |            |              |              |
|(loss)       |            |            |              |              |
|_____________|____________|____________|______________|______________|
|Earnings per |   ($0.06)  |     $0.15  |      $0.10   |      $0.35   |
|share (loss) |            |            |              |              |
|_____________|____________|____________|______________|______________|



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

Outlook Diavik's full-year 2011 target production remains at 6.9 million carats. The Company expects that the retention of some stockpiled goods will result in carats sold being lower than carats produced for fiscal 2012.

Having made very limited sales to specialized clients in October and November, the Company has resumed broader sales in December. The lack of credit available to diamond processors continues to constrain the industry.

A new life-of-mine plan is under final review by Rio Tinto plc and the Company, and is expected to be released prior to the 2012 fiscal year-end. Production for calendar 2012 is currently forecasted at approximately 8.3 million carats.

For the luxury brand segment, the Company continues to focus on strategies that will drive long-term growth. These strategies include initiatives to grow the core bridal and watch businesses, and new jewelry collections.

In addition to the recently opened licensed Harry Winston salon in the Dubai Emirate Towers, a second licensed salon is expected to open in Dubai this fiscal year. The Company plans to add 10 wholesale watch doors through the remainder of the current fiscal year for a total door count of 200 wholesale timepiece doors.

The Company expects to open two directly operated salons in Shanghai at the beginning of the next fiscal year, and also expects to open a second directly operated salon in London next fiscal year.

The Company reaffirms the luxury brand's five year vision presented last year, with goals through fiscal 2016 of growing sales at a cumulative annual growth rate in the mid-teens, generating gross margins in the low 50% range, and operating profit margins in the low to mid-teen range.

Conference Call and Webcast Beginning at 8:30AM (ET) on Friday, December 9, the Company will host a conference call for analysts, investors and other interested parties. Listeners may access a live broadcast of the conference call on the Company's investor relations web site at http://investor.harrywinston.com or by dialing 866-713-8563 within North America or 617-597-5311 from international locations and entering passcode 89392901.

An online archive of the broadcast will be available by accessing the Company's investor relations web site at http://investor.harrywinston.com. A telephone replay of the call will be available one hour after the call through 11:00PM (ET), Friday, December 23, 2011 by dialing 888-286-8010 within North America or 617-801-6888 from international locations and entering passcode 66511433.

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

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

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

Highlights

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

Consolidated sales were $119.7 million for the third quarter compared to $140.9 million for the comparable quarter of the prior year, resulting in a 21% decrease in gross margin to $44.2 million and an operating loss of $2.0 million, compared to an operating profit of $14.8 million in the comparable quarter of the prior year. Consolidated EBITDA was $21.2 million compared to $33.5 million in the comparable quarter of the prior year.

The mining segment recorded sales of $36.2 million, a 40% decrease from $60.7 million in the comparable quarter of the prior year. The decrease in sales resulted from a 64% decrease in volume of carats sold, as the Company has chosen to hold inventory due to market conditions, which was partially offset by a 68% increase in achieved rough diamond prices. The mining segment recorded an operating loss of $3.3 million compared to an operating profit of $9.4 million in the comparable quarter of the prior year. Included in the operating loss was an $13.0 million ($8.4 million after tax) non-cash charge related to the de-recognition of certain assets associated with paste production at the Diavik Diamond Mine, which are no longer expected to be required for underground mining. EBITDA for the mining segment was $16.7 million compared to $24.9 million in the comparable quarter of the prior year.

The luxury brand segment recorded sales of $83.5 million, an increase of 4% from sales of $80.2 million in the comparable quarter of the prior year (a decrease of 4% at constant exchange rates). Operating profit was $1.3 million for the quarter compared to $5.4 million in the comparable quarter of the prior year. EBITDA for the luxury brand segment was $4.5 million compared to $8.6 million in the comparable quarter of the prior year.

The Company recorded a consolidated net loss attributable to shareholders of $4.7 million or $0.06 per share for the quarter, compared to a net profit attributable to shareholders of $12.7 million or $0.15 per share in the third quarter of the prior year. Excluding the $8.4 million after-tax de-recognition of paste production assets, the Company would have recorded a net profit attributable to shareholders of $3.7 million or $0.04 per share for the quarter.

Management's Discussion and Analysis

PREPARED AS OF DECEMBER 8, 2011 (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 HarryWinston Diamond Corporation ("HarryWinston Diamond Corporation", or the "Company") for the three and nine months ended October 31, 2011, andits financial position as at October 31, 2011. This MD&A is based on the Company's unaudited interim condensed consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") and should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto for the three and nine months ended October 31, 2011, and for the three months ended April 30, 2011, and the audited consolidated financial statements of the Company and notes thereto for the year ended January 31, 2011 (prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP" or "CDN GAAP")). Unless otherwise specified, all financial information is presented in United States dollars. Unless otherwise indicated, all references to "third quarter" refer to the three months ended October 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 retail salon network, and expected sales trends and market conditions in the luxury brand segment. Actual results may vary from the forward-looking information. See "Risks and Uncertainties" on page 18 for material risk factors that could cause actual results to differ materially from the forward-looking information.

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

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

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

Summary Discussion

Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the mining and retailing segments of the diamond industry. The Company supplies rough diamonds to the global market from its 40% ownership interest in the Diavik Diamond Mine, located in Canada's Northwest Territories. The Company's luxury brand segment is a premier diamond jeweler and luxury timepiece retailer with salons in key locations including New York, Paris, London, Beijing, 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 HarryWinston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England.

Market Commentary

The Diamond Market During the third quarter, rough diamond prices dropped from the highs achieved in the second quarter, primarily due to the ongoing European sovereign debt crisis. In addition, a build-up of rough diamond inventories prior to the traditionally quiet religious holiday period in India and Israel enabled buyers to exert downward pressure on polished diamond prices. However, the retail diamond market continued to be resilient, leading to an improvement in both the rough and polished diamond markets at the beginning of the fourth quarter.

The Luxury Jewelry & Timepiece Market The luxury jewelry and timepiece market experienced moderate growth during the third quarter as demand from emerging markets remained strong, offsetting the effects of economic uncertainty in Europe and the US. With the trend of rapidly rising wealth and increased mobility of Asian clients, these customers represent a growing share of clientele in all sales regions. New wealthy Chinese consumers continue to be attracted to established luxury brands that have a reputation for providing the highest levels of quality and service.

Condensed Consolidated Financial Results

The following is a summary of the Company's consolidated quarterly results for the eight quarters ended October 31, 2011 following the basis of presentation utilized in its IFRS and Canadian GAAP financial statements:


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

                                                           IFRS                                        CDN GAAP         IFRS        IFRS

                                                                                                                        Nine        Nine
                                                                                                                      months      months
                                                                                                                       ended       ended
                                                                                                                     October     October
                       2012        2012        2012        2011        2011        2011        2011        2010          31,         31,

                         Q3          Q2          Q1          Q4          Q3          Q2          Q1          Q4         2011        2010

Sales             $ 119,716   $ 222,378   $ 143,932   $ 215,358   $ 140,877   $ 153,728   $ 114,000   $ 133,654   $  486,026   $ 408,605

Cost of sales        75,524     150,177      96,452     141,391      84,765      85,798      75,711      96,257      322,153     246,274

Gross margin         44,192      72,201      47,480      73,967      56,112      67,930      38,289      37,397      163,873     162,331

Gross margin
(%)                   36.9%       32.5%       33.0%       34.3%       39.8%       44.2%       33.6%       28.0%        33.7%       39.7%

Selling,
general and
administrative
expenses             46,155      49,101      42,795      52,722      41,282      37,998      35,948      40,479      138,051     115,230

Operating
profit (loss)       (1,963)      23,100       4,685      21,245      14,830      29,932       2,341     (3,082)       25,822      47,101

Finance
expenses            (4,165)     (5,183)     (3,983)     (3,727)     (3,835)     (2,985)     (2,880)     (2,396)     (13,331)     (9,700)

Exploration
costs                 (600)       (781)       (212)       (351)       (212)        (76)        (27)           -      (1,593)       (313)

Finance and
other income            289          83         258         278          69         154         168         129          630         391

Foreign
exchange gain
(loss)                  436         288       (177)       1,392         135       1,043     (2,213)     (1,978)          547     (1,035)

Profit (loss)
before income
taxes               (6,003)      17,507         571      18,837      10,987      28,068     (2,611)     (7,327)       12,075      36,444

Income tax
expense
(recovery)          (1,272)       7,519     (3,027)       5,261     (2,410)      10,877     (5,524)     (5,800)        3,220       2,943

Net profit
(loss)            $ (4,731)   $   9,988   $   3,598   $  13,576   $  13,397   $  17,191   $   2,913   $ (1,527)   $    8,855   $  33,501

Attributable to
shareholders      $ (4,728)   $   9,986   $   3,596   $  13,569   $  12,657   $  13,043   $   2,137   $ (3,358)   $    8,854   $  27,837

Attributable to
non-controlling
interest                (3)           2           2           7         740       4,148         776       1,831            1       5,664

Basic earnings
(loss) per
share             $  (0.06)   $    0.12   $    0.04   $    0.16   $    0.15   $    0.17   $    0.03   $  (0.04)   $     0.10   $    0.35

Diluted
earnings (loss)
per share         $  (0.06)   $    0.12   $    0.04   $    0.16   $    0.15   $    0.17   $    0.03   $  (0.04)   $     0.10   $    0.35

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

Total assets (
(i))              $   1,651   $   1,665   $   1,666   $   1,606   $   1,584   $   1,596   $   1,522   $   1,495   $    1,651   $   1,584

Total long-term
liabilities (
(i))              $     654   $     625   $     605   $     597   $     588   $     531   $     449   $     477   $      654   $     588

Operating
profit (loss)     $ (1,963)   $  23,100   $   4,685   $  21,245   $  14,830   $  29,932   $   2,341   $ (3,082)   $   25,822   $  47,101

Depreciation
and
amortization (
(ii))                23,121      20,716      20,291      24,635      18,657      19,515      14,200      18,258       64,128      52,372

EBITDA ((iii) )   $  21,158   $  43,816   $  24,976   $  45,880   $  33,487   $  49,447   $  16,541   $  15,176   $   89,950   $  99,473





(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 17.

       The comparability of quarter-over-quarter results is impacted by
       seasonality for both the mining and luxury brand segments. Harry
       Winston Diamond Corporation expects that the quarterly results
       for its mining segment will continue to fluctuate depending on
       the seasonality of production at the Diavik Diamond Mine, the
       number of sales events conducted during the quarter, and the
       volume, size and quality distribution of rough diamonds
       delivered from the Diavik Diamond Mine 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 9 for additional information.




Three Months Ended October 31, 2011 ComparedtoThree Months Ended October 31, 2010

CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The Company recorded a third quarter consolidated net loss attributable to shareholders of $4.7 million or $0.06 per share compared to a net profit attributable to shareholders of $12.7million or $0.15 per share in the third quarter of the prior year. Excluding the $8.4 million after-tax de-recognition of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $3.7 million or $0.04 per share for the quarter.

CONSOLIDATED SALES

Sales for the third quarter totalled $119.7 million, consisting of rough diamond sales of $36.2 million and luxury brand segmentsales of $83.5 million. This compares to sales of $140.9 million in the comparable quarter of theprior year (rough diamond sales of $60.7million and luxury brand segment sales of $80.2 million). See"Segmented Analysis" on page 9 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN

The Company's third quarter cost of sales was $75.5 million, for a gross margin of 36.9% compared toa cost of sales of $84.8 million and a gross margin of 39.8% 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 page9 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 $46.2 million for the third quarter compared to $41.3million in the comparable quarter of the prior year.

Included in SG&A expenses for the third quarter was $5.4 million for the mining segment compared to $6.2 million for the comparable quarter of the prior year and $40.8 million for the luxury brand segment compared to $35.1 million for the comparable quarter of the prior year. See"Segmented Analysis" on page 9 for additional information.

CONSOLIDATED INCOME TAXES

The Company recorded a net income tax recovery of $1.3 million during the third quarter, compared to a net income tax recovery of $2.4 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 valuation allowances. 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 third quarter, the Canadian dollar weakened against the US dollar. As a result, the Company recorded an unrealized foreign exchange gain of $8.1 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $2.8 million in the comparable quarter of the prior year. The unrealized foreign exchange gain is recorded as part of the Company's deferred income tax recovery, and is not taxable for Canadian income tax purposes. During the third quarter, the Company also recognized a deferred income tax expense of $11.4 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 $8.1 million recognized in the comparable quarter of the prior year. The recorded tax provision during the third quarter also included a net income tax recovery of $0.7 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $1.3 million recognized in the comparable period of the prior year.

The Company recorded a net income tax recovery of $2.9 million during the third quarter resulting from adjustments and reassessments to prior year tax returns. This compares to a net income tax recovery of nil recorded in the comparable period of the prior year. A deferred income tax recovery of $4.6 million was also recorded during the third quarter as a result of the de-recognition of certain paste production assets associated with the Diavik Diamond Mine.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.

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

CONSOLIDATED FINANCE EXPENSES

Finance expenses of $4.2 million were incurred during the third quarter compared to $3.8 million during the comparable quarter of the prior year.

CONSOLIDATED EXPLORATION COSTS

Exploration costs of $0.6 million were incurred during the third quarter compared to $0.2 million in the comparable quarter of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME

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

CONSOLIDATED FOREIGN EXCHANGE

A net foreign exchange gain of $0.4 million was recognized during the quarter compared to a net foreign exchange gain of $0.1 million in the comparable quarter of the prior year. TheCompany does not currently have any significant foreign exchange derivative instruments outstanding.

Nine Months Ended October 31, 2011 ComparedtoNine Months Ended October 31, 2010

CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS

The Company recorded consolidated net profit attributable to shareholders of $8.9 million or $0.10 per share for the nine months ended October 31, 2011, compared to a net profit attributable to shareholders of $27.8million or $0.35 per share in the comparable period of the prior year. Excluding the $8.4 million after-tax de-recognition of certain paste production assets in the mining segment, the Company would have recorded a net profit attributable to shareholders of $17.3 million or $0.20 per share for the period.

CONSOLIDATED SALES

Sales for the nine months ended October 31, 2011, totalled $486.0 million, consisting of rough diamond sales of $187.9 million and luxury brand segmentsales of $298.1 million. This compares to sales of $408.6 million in the comparable period of theprior year (rough diamond sales of $196.5million and luxury brand segment sales of $212.1million). See"Segmented Analysis" on page 9 for additional information.

CONSOLIDATED COST OF SALES AND GROSS MARGIN

The Company's cost of sales for the nine months ended October 31, 2011, was $322.2 million, for a gross margin of 33.7% compared toa cost of sales of $246.3 million and a gross margin of 39.7% 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 page9 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 $138.1 million for the nine months ended October 31, 2011, compared to $115.2million in the comparable period of the prior year.

Included in SG&A expenses for the nine months ended October 31, 2011, was $19.1 million for the mining segment compared to $14.9 million for the comparable period of the prior year and $119.0 million for the luxury brand segment compared to $100.3 million for the comparable period of the prior year. See"Segmented Analysis" on page 9 for additional information.

CONSOLIDATED INCOME TAXES

The Company recorded a net income tax expense of $3.2 million during the nine months ended October 31, 2011, compared to a net income tax expense of $2.9 million in the comparable period 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 valuation allowances. 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 nine months ended October 31, 2011, the Canadian dollar strengthened against the US dollar. As a result, the Company recorded an unrealized foreign exchange loss of $1.7 million on the revaluation of the Company's Canadian dollar denominated deferred income tax liability. This compares to an unrealized foreign exchange loss of $9.0 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 nine months ended October 31, 2011, 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 $14.7 million recognized in the comparable period of the prior year. The recorded tax provision during the nine months ended October 31, 2011 also included a net income tax recovery of $3.8 million relating to foreign exchange differences between income in the currency of the country of origin and the US dollar. This compares to a net income tax recovery of $3.1 million recognized in the comparable period of the prior year. The Company recorded a net income tax recovery of $2.6 million during the third quarter resulting from adjustments and reassessments to prior year tax returns. This compares to a net income tax recovery of 1.7 million recorded in the comparable period of the prior year.

The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net operating losses are available in certain jurisdictions to offset future income taxes payable in such jurisdictions. The net operating losses are scheduled to expire through 2031.

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 $13.3 million were incurred during the nine months ended October 31, 2011, compared to $9.7 million during the comparable period of the prior year. Finance expenses were impacted by increased debt levels in the mining segment related to the drawdown of $60.0 million on the Standard Chartered Bank credit facility 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 $1.6 million were incurred during the nine months ended October 31, 2011, compared to $0.3 million in the comparable period of the prior year.

CONSOLIDATED FINANCE AND OTHER INCOME

Finance and other income of $0.6 million was recorded during the nine months ended October 31, 2011, compared to $0.4 million in the comparable period of the prior year.

CONSOLIDATED FOREIGN EXCHANGE

A net foreign exchange gain of $0.5 million was recognized during the nine months ended October 31, 2011, compared to a net foreign exchange loss of $1.0 million in the comparable period of the prior year. TheCompany does not currently have any significant foreign exchange derivative instruments outstanding.

Segmented Analysis

The operating segments of the Company include mining and 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        IFRS        IFRS

                                                                                                               Nine        Nine
                                                                                                             months      months
                                                                                                              ended       ended
                                                                                                            October     October
                      2012       2012       2012       2011       2011       2011       2011       2010         31,         31,

                        Q3         Q2         Q1         Q4         Q3         Q2         Q1         Q4        2011        2010

Sales            $  36,239   $ 89,608   $ 62,035   $ 82,697   $ 60,708   $ 86,827   $ 48,922   $ 63,489   $ 187,882   $ 196,457

Cost of sales       34,112     67,613     53,443     61,822     45,039     54,408     44,143     57,027     155,168     143,590

Gross margin         2,127     21,995      8,592     20,875     15,669     32,419      4,779      6,462      32,714      52,867

Gross margin
(%)                   5.9%      24.5%      13.9%      25.2%      25.8%      37.3%       9.8%      10.2%       17.4%       26.9%

Selling,
general and
administrative
expenses             5,390      5,709      8,026      4,828      6,231      4,813      3,870      4,885      19,125      14,915

Operating
profit (loss)    $ (3,263)   $ 16,286   $    566   $ 16,047   $  9,438   $ 27,606   $    909   $  1,577   $  13,589   $  37,952

Depreciation
and
amortization (
(i))                19,932     17,461     17,083     20,669     15,428     16,352     10,975     14,976      54,477      42,755

EBITDA ((ii) )   $  16,669   $ 33,747   $ 17,649   $ 36,716   $ 24,866   $ 43,958   $ 11,884   $ 16,553   $  68,066   $  80,707





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

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




Three Months Ended October 31, 2011 ComparedtoThree Months Ended October 31, 2010

MINING SALES

During the quarter, the Company sold 0.23 million carats for a total of $36.2 million for an average price per carat of $159 compared to 0.64million carats for a total of $60.7 million for an average price per carat of $95 in the comparable quarter of the prior year. The decrease in sales resulted primarily from a 64% decrease in volume of carats sold as the Company chose to hold inventory due to market conditions. The 68% increase in the Company's achieved rough diamond price per carat was primarily the result of the Company's decision to hold back some lower priced goods due to a current 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 in eachquarter.

MINING COST OF SALES AND GROSS MARGIN

The Company's third quarter cost of sales was $34.1 million, resulting in a gross margin of 5.9% compared to a cost of sales of $45.0million and a gross margin of 25.8% in the comparable quarter of the prior year. Cost of sales included $19.3 million of depreciation and amortization compared to $14.8 million in the comparable quarter of the prior year. Included in the cost of sales for the third quarter was a non-cash $13.0 million charge 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 have been de-recognized during the third quarter. Excluding this charge, cost of sales would have been $21.1 million (gross margin of 41.8%), a 53% decrease from 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 $0.8 million from the comparable quarter of the prior year primarily due to the incurrence of executive severance charges of $1.0 million in the comparable quarter of the prior year.

Nine Months Ended October 31, 2011 ComparedtoNine Months Ended October 31, 2010

MINING SALES

During the nine months ended October 31, 2011, the Company sold 1.3 million carats for a total of $187.9 million for an average price per carat of $148 compared to 1.9million carats for a total of $196.5 million for an average price per carat of $104 in the comparable period of the prior year. The decrease in sales resulted from a 33% decrease in volume of carats sold as the Company chose to hold inventory in the third quarter due to market conditions. This was partially offset by a 42% increase in the Company's achieved rough diamond price per carat, which was the result of the Company's decision to hold back some lower priced goods in the third quarter due to a current oversupply in the market combined with an overall increase in the market price of rough diamonds during the nine months ended October 31, 2011 versus the comparable period of the prior year.

The Company expects that results for its mining segment will continue to fluctuate depending on the seasonality of production at the Diavik Diamond Mine, the number of 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 eachquarter.

MINING COST OF SALES AND GROSS MARGIN

The Company's cost of sales for the nine months ended October 31, 2011, was $155.2 million, resulting in a gross margin of 17.4% compared to a cost of sales of $143.6million and a gross margin of 26.9% in the comparable period of the prior year. Cost of sales included $52.6 million of depreciation and amortization compared to $40.9 million in the comparable period of the prior year. The increase in cost of sales was due primarily to a non-cash $13.0 million charge related to the de-recognition of certain components of the Paste Plant. Excluding this charge, cost of sales would have been $142.1 million (gross margin of 24.3%), a 1% decrease from the comparable period of the prior year. This decrease was the result of a 33% decrease in volume of carats sold during the period offset by a higher volume of production during the period from the higher cost underground mine. 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 $4.2 million from the comparable period of the prior year due to a mark-to-market on stock-based compensation and the strengthening of the Canadian dollar during the period.

MINING SEGMENT OPERATIONAL UPDATE

Ore production for the third calendar quarter consisted of 1.62million carats produced from 0.55 million tonnes of ore from the A-418 kimberlite pipe, 0.16million carats produced from 0.07 million tonnes of ore from the A-154 North kimberlite pipe, and 0.08million carats produced from 0.02million tonnes of ore from the A-154 South kimberlite pipe. Also included in production for the calendar quarter was an estimated 0.08 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 8% higher than the comparable calendar quarter of the prior year due primarily to an increase in ore processed.

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


(reported on a
one-month lag)

                                   Three             Three              Nine              Nine
                                  months            months            months            months
                                   ended             ended             ended             ended
                               September         September         September         September
                                     30,               30,               30,               30,
                                    2011              2010              2011              2010

Diamonds                             773               713             2,030             1,983
recovered
(000s carats)

Grade                               3.00              2.98              3.03              3.23
(carats/tonne)




Mining Segment Outlook

PRODUCTION

The Company continues to expect Diavik Diamond Mine production in calendar 2011 of approximately 6.9 million carats from the mining of 2.4 million tonnes of ore and processing of 2.3 million tonnes of ore, with the increment stockpiled. It is expected that with the accelerated production towards the end of the year, carats shipped will be lower than carats produced in calendar 2011. This difference is expected to reverse in calendar 2012. Production for the year is expected to comprise approximately 1.8 million tonnes from the A-418 open pit, and 0.6 million tonnes from the underground portions of A-154 South and A-154 North. Beginning in July 2011, the higher grade A-154 South has been mined using sub-level retreat, a higher velocity and lower cost underground mining method.

A new mine plan and budget for calendar 2012 is under final review by Rio Tinto plc 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 primarily 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 and the A-21 open pit. Multiple mining techniques are under consideration for the A-21 resource with the intention to finalize the investment decision in late calendar 2012. In addition, exploratory drilling has improved the understanding of the ore at depth in the A-418 and A-154 North kimberlite pipes. This work is under technical review and should result in some ore resource being promoted to reserves and the addition of the extensions at depth into ore reserves.

PRICING

The rough diamond market experienced a decline in prices during the third quarter of fiscal 2012 from the highs achieved in the second quarter, which may persist until confidence returns to the global market. Based on prices from the Company's last complete rough diamond sale in July 2011 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. The Company estimates that with the softening rough diamond market, the current market prices have declined by approximately 25% from the July peak.


                                                                   July
                                                                   2011
                                                                average
                                                                  price
                                                                    per
                                                                  carat
                                                                 (in US
Ore type                                                       dollars)

A-154                                                        $      200
South

A-154                                                               260
North

A-418 A                                                             185
Type Ore

A-418 B                                                             120
Type Ore

RPR                                                                  65




COST OF SALES

The Company had projected cost of sales in fiscal 2012 of approximately $265 million (including depreciation and amortization of approximately $80 million) at an assumed average Canadian/US dollar exchange rate of $1.00. Due to lower-than-expected mining costs combined with a weaker Canadian/US dollar exchange rate, the Company would expect cost of sales of approximately $260 million (including depreciation and amortization of approximately $85 million) based on normal rough diamond sales. In light of current market conditions, the Company anticipates holding more rough diamond inventory than normal at January 31, 2012. Depending on the amount of rough diamond inventory carried over into fiscal 2013, a portion of the $260 million cost of sales forecasted for fiscal 2012 would be recognized in fiscal 2013.

The Company expects cost of sales in fiscal 2013 to be approximately $275 million (including depreciation and amortization of approximately $90 million) due to an expected increase in the proportion of underground ore mined, which is more costly to produce.

CAPITAL EXPENDITURES

During fiscal 2012, HWDLP's 40% share of the planned capital expenditures at the Diavik Diamond Mine is expected to be approximately $58 million at an assumed average Canadian/US dollar exchange rate of $1.00. During the third quarter, HWDLP's share of capital expenditures was $10.4 million. During fiscal 2013, HWDLP's 40% share of the planned capital expenditures is expected to be approximately $64 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.

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 andLondon; and four salons in Asia outside of Japan: Beijing, Taipei, Hong Kong and Singapore.


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

                                                        IFRS                                     CDN GAAP        IFRS        IFRS

                                                                                                                 Nine        Nine
                                                                                                               months      months
                                                                                                                ended       ended
                                                                                                              October     October
                     2012        2012       2012        2011       2011       2011       2011        2010         31,         31,

                       Q3          Q2         Q1          Q4         Q3         Q2         Q1          Q4        2011        2010

Sales            $ 83,477   $ 132,770   $ 81,897   $ 132,661   $ 80,169   $ 66,901   $ 65,078   $  70,165   $ 298,144   $ 212,148

Cost of sales      41,412      82,564     43,009      79,569     39,726     31,390     31,568      39,230     166,985     102,684

Gross margin       42,065      50,206     38,888      53,092     40,443     35,511     33,510      30,935     131,159     109,464

Gross margin
(%)                 50.4%       37.8%      47.5%       40.0%      50.4%      53.1%      51.5%       44.1%       44.0%       51.6%

Selling,
general and
administrative
expenses           40,765      43,392     34,769      47,894     35,051     33,185     32,078      35,594     118,926     100,315

Operating
profit (loss)    $  1,300   $   6,814   $  4,119   $   5,198   $  5,392   $  2,326   $  1,432   $ (4,659)   $  12,233   $   9,149

Depreciation
and
amortization (
(i))                3,188       3,255      3,209       3,966      3,229      3,162      3,226       3,282       9,652       9,617

EBITDA ((ii) )   $  4,488   $  10,069   $  7,328   $   9,164   $  8,621   $  5,488   $  4,658   $ (1,377)   $  21,885   $  18,766





((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 17.




Three Months Ended October 31, 2011 ComparedtoThree Months Ended October 31, 2010

LUXURY BRAND SALES

Sales for the third quarter were $83.5 million compared to $80.2 millionfor the comparable quarter of the prior year, an increase of 4% (a decrease of 4% at constant exchange rates). US sales increased 44% to $32.5 million, sales in Asia increased 14% to $28.3 million and European sales decreased 31% to $22.7 million. The third quarter of the prior year included several significant sales in Europe that were not repeated in the current third quarter.

LUXURY BRAND COST OF SALES AND GROSS MARGIN

Cost of sales for the luxury brand segment for the third quarter was $41.4 million compared to $39.7 million for the comparable quarter of the prior year. Gross margin for the quarter was $42.1 million or 50.4% compared to $40.4 million or 50.4% for the third quarter of the prior year.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses increased by 16% to $40.8 million from $35.1 million in the comparable quarter of the prior year (9% at constant exchange rates). The increase was due primarily to higher advertising, marketing and selling expenses and increased rent and building related expenses. Fixed costs accounted for $5.2 million of the increase, while variable expenses linked to higher volume of sales accounted for $0.5 million of the increase. SG&A expenses included depreciation and amortization expense of $3.1 million consistent with the comparable quarter of the prior year.

Nine Months Ended October 31, 2011 ComparedtoNine Months Ended October 31, 2010

LUXURY BRAND SALES

Sales for the nine months ended October 31, 2011, were $298.1 million compared to $212.1 millionfor the comparable period of the prior year, an increase of 41% (29% at constant exchange rates). Sales in Asia increased 77% to $126.2 million, US sales increased 53% to $97.9 million and European sales decreased 4% to $74.0 million. During the period there were $60.8 million of high-value transactions, which carry generally lower-than-average gross margins.

LUXURY BRAND COST OF SALES AND GROSS MARGIN

Cost of sales for the luxury brand segment for the nine months ended October 31, 2011, was $167.0 million compared to $102.7 million for the comparable period of the prior year. Gross margin for the nine months ended October 31, 2011, was $131.2 million or 44.0% compared to $109.5 million or 51.6% for the comparable period of the prior year. The decrease in gross margin resulted primarily from exceptional high-value transactions during the period, which carry generally lower-than-average gross margins.

LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

SG&A expenses increased by 19% to $118.9 million from $100.3 million in the comparable period of the prior year (11% at constant exchange rates). 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 $15.0 million of the increase, while variable expenses linked to higher volume of sales accounted for $3.6 million of the increase. SG&A expenses included depreciation and amortization expense of $9.4 million consistent with the comparable period of the prior year.

LUXURY BRAND SEGMENT OPERATIONAL UPDATE

During the nine months ended October 31, 2011, the luxury brand segment generated sales of $298.1 million, an increase of 41% over the comparable period of the prior year at actual exchange rates. The Company recorded significant high-value transactions of $60.8 million during the nine-month period. The US market generated sales of $97.9 million, an increase of 53% over the comparable quarter of the prior year. The long-term trend of growing wealth in Asia has resulted in increasing mobility of luxury consumers, benefiting the US market. In Japan, sales of $53.3 million increased by 25% at actual exchange rates and by 13% on a constant exchange rate basis over the comparable period of the prior year. Asia (excluding Japan) had sales of $72.9 million, representing an increase of 157% at actual exchange rates and positive 143% on a constant exchange basis over the comparable period of the prior year. In Europe, sales of $74.0 million were 4% lower at actual exchange rates and negative 17% on a constant exchange basis over the comparable period of the prior year.

A new licensed Harry Winston salon was opened in the Emirates Towers in Dubai, United Arab Emirates, during the third quarter.

The luxury brand segment's distribution network consists of 19 directly operated salons, three licensed salons (in Manila, Philippines, Kiev, Ukraine and Dubai, United Arab Emirates) and 190 wholesale watch doors around the world.

Luxury Brand Segment Outlook The Company remains confident that its product offering, supported by a strong advertising campaign, will translate into solid fourth quarter results. The Company's global distribution network will continue to allow the Company to benefit from the increasing mobility of high-end luxury consumers. The Company continues to focus on strategies that will drive long-term growth. These strategies include initiatives to grow the core bridal and watch businesses, and new jewelry collections.

A second licensed salon is expected to be opened in Dubai, United Arab Emirates, and the Company plans to add 10 wholesale watch doors through the remainder of the fiscal year. Two new directly operated salons in Shanghai, China, are expected to be opened early next year and a second directly operated salon in London, UK, in mid-2012. A key component of the luxury brand's growth strategy is the expansion of its current salon network and wholesale distribution channel. The growth target is to expand to approximately 35 directly operated salons, 15 licensed salons, and 300 wholesale doors by fiscal 2016.

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.

Liquidity and Capital Resources

Working Capital As at October 31, 2011, the Company had unrestricted cash and cash equivalents of $83.2million compared to $108.7million at January 31, 2011. The Company had cash on hand and balances with banks of $80.9million and short-term investments of $2.3million at October 31, 2011. During the quarter ended October 31, 2011, the Company reported use of cash from operations of $17.4million compared to a source of cash of $13.6million in the comparable quarter of the prior year, which resulted primarily from the Company's decision to hold rough diamond inventory due to market conditions. At October 31, 2011, the Company had 1.1 million carats of rough diamond inventory available for sale at an estimated current market value of $123 million.

Working capital increased to $428.5million at October 31, 2011, from $328.6million at January 31, 2011. During the quarter, the Company increased accounts receivable by $0.9 million, increased inventory and supplies by $37.5million, increased other current assets by $2.8 million, increased trade and other payables by $5.9million and increased employee benefit plans by $0.5 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, and trade and other payables and income taxespayable.

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

Financing Activities The mining segment maintains a senior secured revolving credit facility with Standard Chartered Bank that was increased from $100.0 million to $125.0 million on February 28, 2011. At October 31, 2011, $60.0 million was outstanding compared to $50.0 million at January 31, 2011.

During the quarter, 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 October 31, 2011, $34.7 million and $2.8 million was outstanding under the Company's revolving financing facility relating to its Belgium subsidiary, Harry Winston Diamond International N.V., and its India subsidiary, HarryWinston Diamond (India) Private Limited, respectively, compared to $nil at January 31, 2011.

During the quarter ended October 31, 2011, the luxury brand subsidiary, Harry Winston Inc., increased the amount outstanding on its secured five-year revolving credit facility to $201.5 million from $165.0 million at January 31, 2011.

Investing Activities During the third quarter, the Company purchased property, plant and equipment of $14.8million, of which $10.8million was purchased for the mining segment and $4.0 million for the luxury brand segment.

Contractual Obligations The Company has contractual payment obligations with respect to interest-bearing loans and borrowings and, through its participation in the JointVenture, 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 capitalexpenditures for the calendar years 2011 to 2015, is approximately $170million assuming a Canadian/US average exchange rate of $1.00 for the fiveyears. The most significant contractual obligations for the ensuing five-year period can be summarized as follows:


CONTRACTUAL                                 Less            Year             Year           After
OBLIGATIONS                                 than

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

Interest-bearing       $   369,368     $  72,111     $   274,707     $      4,872     $    17,678
loans and
borrowings (a)
(b)

Environmental               95,072        82,553             683            4,820           7,016
and
participation
agreements
incremental
commitments (c)

Operating lease            231,738        24,409          40,459           39,121         127,749
obligations (d)

Total                  $   696,178     $ 179,073     $   315,849     $     48,813     $   152,443
contractual
obligations





(a)     Interest-bearing loans and borrowings presented in the
        foregoing table include current and long-term portions. The
        mining segment maintains a senior secured revolving credit
        facility with Standard Chartered Bank for $125.0 million. The
        facility has an initial maturity date of June 24, 2013, with
        two one-year extensions at the Company's option. There are no
        scheduled repayments required before maturity. At October 31,
        2011, $60.0 million was outstanding.



        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.



        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 October 31, 2011, $34.7 million and $2.8
        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 October 31,
        2011, $201.5 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 ($20.1 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 ($4.0 million) loan and a CHF 14.0 million
        ($16.1 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 October 31, 2011, $17.8 million was
        outstanding.
        The bank has a secured interest in the factory building.



        Harry Winston Japan, K.K. maintains unsecured credit agreements
        with two banks, amounting to ¥1,170 million ($15.0 million).
        Harry Winston Japan, K.K. also maintains a secured credit
        agreement amounting to ¥575 million ($7.4 million). This
        facility is secured by inventory owned by Harry Winston Japan,
        K.K.



        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
        October 31, 2011, $6.6 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
        October 31, 2011, 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 $10.8 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 October 31, 2011, was $80.8 million based on its 40%
        ownership interest in the Diavik Diamond Mine. There can be no
        assurance that the operator will continue its practice of
        posting letters of credit in fulfillment of this obligation, in
        which event HWDLP would be required to post its proportionate
        share of such security directly, which would result in
        additional constraints on liquidity. The requirement to post
        security for the reclamation and abandonment obligations may be
        reduced to the extent of amounts spent by the Joint Venture on
        those activities. The Joint Venture has also signed
        participation agreements with various native groups. These
        agreements are expected to contribute to the social, economic
        and cultural well-being of area Aboriginal bands. The actual
        cash outlay for the Joint Venture's obligations under these
        agreements is not anticipated to occur until later in the life
        of the Diavik Diamond Mine.



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




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        IFRS        IFRS

                                                                                                                              Nine        Nine
                                                                                                                            months      months
                                                                                                                             ended       ended
                                                                                                                           October     October
                      2012         2012         2012         2011         2011         2011         2011          2010         31,         31,

                        Q3           Q2           Q1           Q4           Q3           Q2           Q1            Q4        2011        2010

Operating      $   (1,963)   $   23,100   $    4,685   $   21,245   $   14,830   $   29,932   $    2,341   $   (3,082)   $  25,822   $  47,101
profit
(loss)

Depreciation        23,121       20,716       20,291       24,635       18,657       19,515       14,200        18,258      64,128      52,372
and
amortization

EBITDA         $    21,158   $   43,816   $   24,976   $   45,880   $   33,487   $   49,447   $   16,541   $    15,176   $  89,950   $  99,473







MINING SEGMENT

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

                                                             IFRS                                            CDN GAAP        IFRS        IFRS

                                                                                                                             Nine        Nine
                                                                                                                           months      months
                                                                                                                            ended       ended
                                                                                                                          October     October
                      2012         2012         2012         2011         2011         2011         2011         2010         31,         31,

                        Q3           Q2           Q1           Q4           Q3           Q2           Q1           Q4        2011        2010

Operating      $   (3,263)   $   16,286   $      566   $   16,047   $    9,438   $   27,606   $      909   $    1,577   $  13,589   $  37,952
profit
(loss)

Depreciation        19,932       17,461       17,083       20,669       15,428       16,352       10,975       14,976      54,477      42,755
and
amortization

EBITDA         $    16,669   $   33,747   $   17,649   $   36,716   $   24,866   $   43,958   $   11,884   $   16,553   $  68,066   $  80,707







LUXURY BRAND SEGMENT

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

                                                         IFRS                                        CDN GAAP        IFRS        IFRS

                                                                                                                     Nine        Nine
                                                                                                                   months      months
                                                                                                                    ended       ended
                                                                                                                  October     October
                    2012         2012        2012        2011        2011        2011        2011        2010         31,         31,

                      Q3           Q2          Q1          Q4          Q3          Q2          Q1          Q4        2011        2010

Operating      $   1,300   $    6,814   $   4,119   $   5,198   $   5,392   $   2,326   $   1,432   $ (4,659)   $  12,233   $   9,149
profit
(loss)

Depreciation       3,188        3,255       3,209       3,966       3,229       3,162       3,226       3,282       9,652       9,617
and
amortization

EBITDA         $   4,488   $   10,069   $   7,328   $   9,164   $   8,621   $   5,488   $   4,658   $ (1,377)   $  21,885   $  18,766




Risks and Uncertainties

Harry Winston Diamond Corporation is subject to a number of risks and uncertainties as a result of its operations. Inaddition 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 paste backfill strengths, and unexpected local ground conditions. Hazards, such as unusual or unexpected rock formations, rock bursts, pressures, collapses, flooding or other conditions, may be encountered during mining. Such risks could result in personal injury or fatality; damage to or destruction of mining properties, processing facilities or equipment; environmental damage; delays, suspensions or permanent reductions in mining production; monetary losses; and possible legal liability.

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

Nature of Joint Arrangement with 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. Byvirtue 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 further 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.

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 and the European Union or otherwise, the 2011 disaster in Japan and political upheavals in the Middle East, could cause the Company to experience further 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 USdollar price, and although the Company reports its financial results in US dollars, a majority of the costs and expenses of the DiavikDiamond 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 theCompany will receive from diamond sales, and will decrease the US dollar revenues received by Harry Winston Inc. Fromtime to time, the Company may use a limited number of derivative financial instruments to manage its foreign currencyexposure.

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 October31, 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 Diavikproperty.

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

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

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

Resource and Reserve Estimates The Company's figures for mineral resources and ore reserves on the Diavik group of mineral claims are estimates, and no assurance can be given that the anticipated carats will be recovered. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information 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 transportedto the mine site by way ofthe 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.

Thecost of the fuelpurchased is based on the then prevailingprice and expensed into operating costs ona usage basis. TheDiavik 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 DiavikDiamond Mine.

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

Expansion and Refurbishment of the Existing Salon Network A key component of the Company's luxury brand strategy in recent years has been the expansion of its salon network. The Company currently expects to expand its retail salon network to a total of 35 salons and 300 wholesale doors worldwide by fiscal 2016. An additional objective of the Company is to achieve a compound annual growth rate in sales in the mid-teens in the luxury brand segment and an operating profit in the low to mid-teens in the luxury brand segment, in each case over the five-year period from fiscal 2012 to 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 three 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 HarryWinston Inc. is unable to successfully compete in the luxury jewelry segment, the Company's results of operations will be adversely affected.

Changes in Disclosure Controls and Procedures and Internal Control over FinancialReporting

During the third quarter of fiscal 2012, there were no changes in the Company's disclosure controls and procedures or internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's disclosure controls and procedures or internal control over financial reporting.

Critical Accounting Estimates

Management is often required to make judgments, assumptions and estimates in the application of IFRS that have a significant impact on the financial results of the Company. Certain policies are more significant than others and are, therefore, considered critical accounting policies. Accounting policies are considered critical if they rely on a substantial amount of judgment (use of estimates) in their application or if they result from a choice between accounting alternatives and that choice has a material impact on the Company's reported resultsor financial position. There have been no significant changes to critical accounting estimates since the first quarter of fiscal 2012.

Changes in Accounting Policies

The International Accounting Standards Board ("IASB") has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities. This standard becomes effective for the Company's fiscal year end beginning February 1, 2013. The Company is currently assessing the impact of the new standard on its 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.

Outstanding Share Information


As at
November
30, 2011

Authorized                                                     Unlimited

Issued and                                                    84,841,781
outstanding
shares

Options                                                        2,433,899
outstanding

Fully                                                         87,275,680
diluted




Additional Information

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



                  Condensed Consolidated Balance Sheets

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



                                      October 31,           January 31,

                                             2011                  2011

ASSETS

Current assets

  Cash and cash                     $      83,183         $     108,693
  equivalents (note
  4)

  Accounts receivable                      31,819                22,788

  Inventory and                           483,666               403,212
  supplies (note 5)

  Other current                            38,849                38,662
  assets

                                          637,517               573,355

Property, plant and                       731,694               764,093
equipment - Mining

Property, plant and                        62,404                61,019
equipment - Luxury
brand

Intangible assets,                        127,476               127,894
net (note 7)

Other non-current                          13,890                16,626
assets

Deferred income tax                        77,628                62,693
assets

Total assets                        $   1,650,609         $   1,605,680



LIABILITIES AND
EQUITY

Current liabilities

  Trade and other                   $     113,193         $     136,490
  payables

  Income taxes                             27,549                 6,660
  payable

  Employee benefit                          6,966                 7,378
  plans (note 8)

  Promissory note                               -                70,000
  (note 9)

  Current portion of                       61,349                24,215
  interest-bearing
  loans and
  borrowings (note 9)

                                          209,057               244,743

Interest-bearing                          282,610               237,621
loans and borrowings
(note 9)

Deferred income tax                       309,394               301,980
liabilities

Employee benefit                            7,913                 7,287
plans (note 8)

Provisions                                 53,656                50,130

Total liabilities                         862,630               841,761

Equity

  Share capital (note                     509,592               502,129
  10)

  Contributed surplus                      15,535                16,233

  Retained earnings                       246,521               237,667

  Accumulated other                        16,064                 7,624
  comprehensive
  income

  Total shareholders'                     787,712               763,653
  equity

  Non-controlling                             267                   266
  interest

Total equity                              787,979               763,919

Total liabilities and               $   1,650,609         $   1,605,680
equity




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





                        Condensed Consolidated Income Statements

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



                                 Three            Three             Nine             Nine
                                months           months           months           months
                                 ended            ended            ended            ended
                               October          October          October          October
                                   31,              31,              31,              31,

                                  2011             2010             2011             2010

Sales                     $    119,716     $    140,877     $    486,026     $    408,605

Cost of sales                   75,524           84,765          322,153          246,274

Gross margin                    44,192           56,112          163,873          162,331

Selling,                        46,155           41,282          138,051          115,230
general and
administrative
expenses

Operating                      (1,963)           14,830           25,822           47,101
profit

Finance                        (4,165)          (3,835)         (13,331)          (9,700)
expenses

Exploration                      (600)            (212)          (1,593)            (313)
costs

Finance and                        289               69              630              391
other income

Foreign                            436              135              547          (1,035)
exchange gain
(loss)

Profit (loss)                  (6,003)           10,987           12,075           36,444
before income
taxes

Net income tax                 (1,272)          (2,410)            3,220            2,943
expense
(recovery)

Net profit                $    (4,731)     $     13,397     $      8,855     $     33,501
(loss)

Attributable to           $    (4,728)     $     12,657     $      8,854     $     27,837
shareholders

Attributable to           $        (3)     $        740     $          1     $      5,664
non-controlling
interest

Earnings (loss)
per share

  Basic                   $     (0.06)     $       0.15     $       0.10     $       0.35

  Diluted                 $     (0.06)     $       0.15     $       0.10     $       0.35

Weighted                    84,809,781       82,063,200       84,597,861       78,444,841
average number
of shares
outstanding




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





           Condensed Consolidated Statements of Comprehensive Income

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



                           Three         Three          Nine          Nine
                          months        months        months        months
                           ended         ended         ended         ended
                         October       October       October       October
                             31,           31,           31,           31,

                            2011          2010          2011          2010

Net profit            $  (4,731)     $  13,397     $   8,855     $  33,501
(loss)



Other
comprehensive
income

  Net gain
  (loss) on
  translation
  of net
  foreign
  operations
  (net of tax
  of nil)                (7,337)         4,768         8,440         6,798

  Change in
  fair value of
  derivative
  financial
  instrument
  (net of tax
  of $0.1
  million for
  the three
  months and
  $0.2 million
  for the nine
  months ended
  October 31,
  2010)                        -           101             -           354

  Actuarial                    -             -             -         (636)
  loss on
  employee
  benefit plans
  (net of tax
  of nil)

Other                    (7,337)         4,869         8,440         6,516
comprehensive
income, net of
tax

Total                 $ (12,068)     $  18,266     $  17,295     $  40,017
comprehensive
income

Attributable to       $ (12,065)     $  17,526     $  17,294     $  34,353
shareholders

Attributable to       $      (3)     $     740     $       1     $   5,664
non-controlling
interest




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





               Condensed Consolidated Statements of Changes in Equity

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



                          Three           Three          Nine            Nine
                         months          months        months          months
                          ended           ended         ended           ended
                        October         October       October         October
                            31,             31,           31,             31,

                           2011            2010          2011            2010

Common shares:

Balance at            $ 509,410     $   426,842     $ 502,129     $   426,593
beginning of
period

Issued during               182          72,200         5,163          72,449
the period

Transfer from                 -           2,633         2,300           2,633
contributed
surplus on
exercise of
options

Balance at end          509,592         501,675       509,592         501,675
of period

Contributed
surplus:

Balance at               15,043          18,078        16,233          17,730
beginning of
period

Stock-based                 492             434         1,602             782
compensation
expense

Transfer from                 -         (2,633)       (2,300)         (2,633)
contributed
surplus on
exercise of
options

Balance at end           15,535          15,879        15,535          15,879
of period

Retained
earnings:

Balance at              251,249         265,248       237,667         250,068
beginning of
period

Net profit              (4,728)          12,657         8,854          27,837
(loss)
attributable to
common
shareholders

Reacquisition                 -        (53,808)             -        (53,808)
of partnership
units
(including
transaction
costs)

Balance at end          246,521         224,097       246,521         224,097
of period

Accumulated
other
comprehensive
income:

Balance at               23,401           (923)         7,624         (2,570)
beginning of
period

Other
comprehensive
income

  Net gain
  (loss) on
  translation
  of net
  foreign
  operations
  (net of tax
  of nil)               (7,337)           4,768         8,440           6,798

  Change in
  fair value of
  derivative
  financial
  instruments
  (net of tax
  of $0.1
  million for
  the three
  months and
  $0.2 million
  for the nine
  months ended
  October 31,
  2010)                       -             101             -             354

  Actuarial                   -               -             -           (636)
  loss on
  employee
  benefit plans
  (net of tax
  of nil)

Balance at end           16,064           3,946        16,064           3,946
of period

Non-controlling
interest:

Balance at                  270         173,361           266         178,337
beginning of
period

Non-controlling             (3)             740             1           5,664
interest

Distribution to               -               -             -         (9,900)
Kinross

Reacquisition                 -       (173,842)             -       (173,842)
of Kinross
interest

Balance at end              267             259           267             259
of period

Total                 $ 787,979     $   745,856     $ 787,979     $   745,856
shareholders'
equity




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





                     Condensed Consolidated Statements of Cash Flows

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



                            Three          Three            Nine            Nine
                           months         months          months          months
                            ended          ended           ended           ended
                          October        October         October         October
                              31,            31,             31,             31,

                             2011           2010            2011            2010

Cash provided by
(used in)

OPERATING

Net profit             $  (4,731)     $   13,397     $     8,855     $    33,501

  Depreciation             23,121         18,657          64,128          52,372
  and
  amortization

  Deferred                (4,781)        (3,021)         (8,200)              21
  income tax
  expense
  (recovery)

  Current income            3,509            611          11,420           2,922
  tax expense

  Finance                   4,165          3,835          13,331           9,700
  expenses

  Stock-based                 492            434           1,602             782
  compensation

  Other non-cash                -            360               -             564
  items

  Foreign                 (3,240)          1,054         (3,432)           2,835
  exchange gain
  (loss)

  Loss on                       -              -               -             243
  disposal of
  assets

  Income tax              (1,077)       (14,105)           9,376        (31,668)
  refund (paid),
  net

Change in
non-cash
operating
working capital,
excluding taxes
and finance
expenses                 (34,883)        (7,639)        (92,399)        (30,521)

Cash provided            (17,425)         13,583           4,681          40,751
from (used in)
operating
activities

FINANCING

Decrease in                 (178)          (408)           (532)         (1,127)
interest-bearing
loans and
borrowings

Increase in               126,286         77,362         211,890         239,537
revolving credit

Decrease in              (69,457)                      (127,464)       (157,948)
revolving credit                        (67,705)

Interest paid             (6,329)        (2,144)        (11,526)         (6,152)

Repayment of             (70,000)              -        (70,000)               -
promissory note

Issue of common               182          2,463           5,163           2,712
shares, net of
issue costs

Distribution to                 -              -               -         (9,900)
Kinross

Cash provided            (19,496)          9,568           7,531          67,122
from financing
activities

INVESTING

Reacquisition of                -       (51,450)               -        (51,450)
partnership
units

Property, plant          (10,796)       (12,310)        (35,880)        (32,318)
and equipment -
Mining

Property, plant           (4,050)        (1,815)         (7,338)         (2,913)
and equipment -
Luxury brand

Other                       (363)          (661)         (1,185)         (4,121)
non-current
assets

Cash used in             (15,209)       (66,236)        (44,403)        (90,802)
investing
activities

Foreign exchange          (4,568)          3,203           6,681           5,052
effect on cash
balances

Increase in cash         (56,698)       (39,882)        (25,510)          22,123
and cash
equivalents

Cash and cash             139,881        124,974         108,693          62,969
equivalents,
beginning of
period

Cash and cash          $   83,183     $   85,092     $    83,183     $    85,092
equivalents, end
of period

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

Accounts                    (890)        (1,677)         (9,116)         (4,118)
receivable

Inventory and            (37,522)       (22,435)        (61,958)        (81,541)
supplies

Other current             (2,806)          7,845           (189)          10,998
assets

Trade and other             5,865          7,512        (21,307)          50,002
payables

Employee benefit              470          1,116             171         (5,862)
plans

                       $ (34,883)     $  (7,639)     $  (92,399)     $  (30,521)




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

Notes to Condensed Consolidated Financial Statements

OCTOBER 31, 2011 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 HarryWinston Diamond Limited Partnership ("HWDLP") (40%) where HWDLP holds an undivided 40% ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine. DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London, England, and Harry Winston Diamond Limited Partnership is a wholly owned subsidiary of HarryWinston 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.

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

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 unaudited interim condensed consolidated financial statements have been approved for issue by the Audit Committee on December 8, 2011.

Note 2: Basis of Preparation


(a)  Statement of compliance

     These unaudited interim condensed consolidated financial
     statements have been prepared in accordance with International
     Financial Reporting Standards ("IFRS") International Accounting
     Standard ("IAS") 34, "Interim Financial Reporting". The Company's
     first annual consolidated financial statements under IFRS will be
     presented for the fiscal year ending January 31, 2012. The
     accounting policies adopted in these unaudited interim condensed
     consolidated financial statements are consistent with the
     accounting policies the Company expects to adopt in its IFRS
     consolidated financial statements for the fiscal year ending
     January 31, 2012, and are based on IFRS as issued by the
     International Accounting Standards Board ("IASB") that the Company
     expects to be applicable at that time.



     These unaudited interim condensed consolidated financial
     statements do not include all disclosures required by IFRS for
     annual consolidated financial statements and accordingly should be
     read in conjunction with the Company's audited consolidated
     financial statements for the year ended January 31, 2011 presented
     under generally accepted accounting principles in Canada
     (''Canadian GAAP'') and in conjunction with the IFRS transition
     disclosures in Note 15 to these interim statements. These
     unaudited interim condensed consolidated financial statements have
     been prepared following the same accounting policies and methods
     of computation as presented in the unaudited interim condensed
     consolidated financial statements of April 30, 2011.



(b)  Basis of measurement

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


         --  financial instruments held for trading are measured at
             fair value through profit and loss
         --  liabilities for RSU and DSU plans are measured at fair
             value


(c)  Currency of presentation

     These condensed consolidated interim 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: Changes in Accounting Policies

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. These standards may result in consequential changes to the accounting policies and other note disclosures.


(i)             Fair Value Measurement Guidelines

(ii)            IAS 1 (Revised) - Presentation of Financial Statements

(iii)           IAS17 (Replacement) - Leases

(iv)            IAS 32 (Replacement) - Liabilities and Equity

(v)             IAS 19 (Replacement) - Employee Benefits and Pensions

(vi)            IAS 11 and IAS 18 (Replacement) - Revenue Recognition

(vii)           Improvements to IFRSs




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, 2013. The Company is currently assessing the impact of the new standard on its 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.

Note 4: Cash Resources


                                                    October         January
                                                        31,             31,
                                                       2011            2011

Cash on
hand and                                        $               $
balances
with banks                                           80,896         107,993

Short-term
investments
((a))                                                 2,287             700

Total cash                                      $               $
resources                                            83,183         108,693




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

Note 5: Inventory and Supplies


                                                                 October           January
                                                                     31,               31,
                                                                    2011              2011

Luxury brand raw
materials and                                                                  $
work-in-progress                                             $   114,745            80,013

Luxury brand
merchandise
inventory                                                        218,494           226,358

Mining rough
diamond
inventory                                                         80,567            30,451

Mining supplies
inventory                                                         69,860            66,390

Total inventory                                                                $
and supplies                                                 $   483,666           403,212




Total inventory and supplies is net of a provision for obsolescence of $ 2.0 million ($2.9 million at January 31, 2011).

Note 6: Diavik Joint Venture

The following represents HWDLP's 40% proportionate interest in the Joint Venture as at September 30, 2011 and December 31, 2010:


                                                        October           January
                                                            31,               31,
                                                           2011              2011

Current                                             $                 $
assets                                                   96,727            92,487

Non-current
assets                                                  679,409           714,386

Current
liabilities                                              37,368            31,493

Non-current
liabilities
and
participant's
account                                                 738,768           775,380





                          Three            Three              Nine             Nine
                         months           months            months           months
                          ended            ended             ended            ended
                        October          October           October          October
                            31,              31,               31,              31,
                           2011             2010              2011             2010

Expenses
net of
interest
income (
(a) (b))           $     57,918     $     52,353     $     181,576     $    147,818

Cash flows
resulting
from (used
in)
operating
activities             (26,920)         (31,951)         (116,815)         (85,265)

Cash flows
resulting
from
financing
activities               39,156           41,189           154,239          113,108

Cash flows
resulting
from (used
in)
investing
activities             (13,460)         (11,164)          (35,680)         (30,153)





((a))     The Joint Venture only earns interest income.

((b))     Expenses net of interest income for the three and nine months
          ended October 31, 2011 of $nil and $0.1 million, respectively
          (three and nine months ended October 31, 2010 of $nil and
          $0.1 million, respectively).




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

During the third quarter, the Company recognized a non-cash $13.0 million charge 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 have been de-recognized during the third quarter.

Note 7: Intangible Assets


                                                                             October         January
                                                                                 31,             31,
                   Amortization                          Accumulated            2011            2011
                         period            Cost         amortization             net             net

Trademark            indefinite     $               $                    $               $
                           life         112,995                    -         112,995         112,995

Drawings             indefinite
                           life          12,365                    -          12,365          12,365

Wholesale
distribution
network              120 months           5,575              (3,459)           2,116           2,534

Intangible                          $               $                    $               $
assets                                  130,935              (3,459)         127,476         127,894




Amortization expense for the nine months ended October 31, 2011 was $0.4 million ($1.0 million for the nine months ended October 31, 2010).

Note 8: Employee Benefit Plans

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


                                      October 31,         January 31,
                                             2011                2011

Defined benefit plan
obligation - Harry Winston
luxury brand segment              $        10,465     $         9,009

Defined contribution plan
obligation - Harry Winston
luxury brand segment                          800                  80

Defined contribution plan
obligation - Harry Winston
mining segment                                169                   -

Defined contribution plan
obligation - Diavik Diamond
Mine                                            -               3,061

RSU and DSU plans (note 10)                 3,445               2,515

Total employee benefit plan
obligation                        $        14,879     $        14,665



                                      October 31,         January 31,
                                             2011                2011

Non-current                       $         7,913     $         7,287

Current                                     6,966               7,378

Total employee benefit plan
obligation                        $        14,879     $       14,665




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



                   Three       Three
                  months      months
                   ended       ended     Nine months     Nine months
                 October     October           ended           ended
                     31,         31,     October 31,     October 31,
                    2011        2010            2011            2010

Defined
benefit
pension plan
- Harry        $           $           $               $
Winston
luxury brand
segment              655         532           1,909           1,540

Defined
contribution
plan - Harry
Winston
luxury brand
segment              240         210             720             630

Defined
contribution
plan - Harry
Winston
mining
segment               32          55             175             161

Defined
contribution
plan -
Diavik
Diamond Mine         481         236           1,616             785

RSU and DSU
plans (note
10)                  182         355           1,897           1,047

               $   1,590   $   1,388   $       6,317   $       4,163




Note 9: Interest-Bearing Loans and Borrowings


                                                                       October      January
                                                                           31,          31,
                                                                          2011         2011

Mining segment credit facilities                                    $   58,184   $   50,000

Mining segment promissory note                                               -       70,000

Harry Winston Inc. credit facilities                                   219,283      181,715

First mortgage on real property                                          6,561        7,048

Bank advances                                                           59,931       22,902

Finance leases                                                               -          171

Total interest-bearing loans and borrowings                            343,959      331,836

Less current portion                                                  (61,349)     (94,215)

                                                                   $   282,610   $  237,621



                                                            Face
                                              Carrying     value
                                                amount        at
                        Nominal                     at   October
                       interest     Date of    October       31,
            Currency       rate    maturity   31, 2011      2011                   Borrower

Secured                           March 31,     $201.5    $201.5
bank loan         US      3.75%        2013    million   million         Harry Winston Inc.

Secured                           April 22,       $4.0      $4.0
bank loan        CHF      3.15%        2013    million   million         Harry Winston S.A.

Secured                             January      $13.8     $13.8
bank loan        CHF      3.55%    31, 2033    million   million         Harry Winston S.A.

Secured                            June 24,      $50.0     $50.0      Harry Winston Diamond
bank loan         US      4.01%        2013    million   million            Corporation and

Secured                            June 24,      $10.0     $10.0      Harry Winston Diamond
bank loan         US      4.36%        2013    million   million                 Mines Ltd.

First
mortgage
on real                           September       $6.6      $6.6
property         CDN      7.98%     1, 2018    million   million        6019838 Canada Inc.

Secured
bank                                 Due on      $34.7     $34.7      Harry Winston Diamond
advance           US      4.55%      demand    million   million         International N.V.

Secured                                                               Harry Winston Diamond
bank                                 Due on       $2.8      $2.8            (India) Private
advance           US     12.00%      demand    million   million                    Limited

Secured
bank                               February       $7.4      $7.4       Harry Winston Japan,
advance          YEN      2.50%    22, 2012    million   million                       K.K.

Unsecured
bank                               November       $7.8      $7.8       Harry Winston Japan,
advance          YEN      2.98%    30, 2011    million   million                       K.K.

Unsecured
bank                               November       $7.2      $7.2       Harry Winston Japan,
advance          YEN      2.98%    24, 2011    million   million                       K.K.




On February 28, 2011, the Company increased the mining segment senior secured revolving credit facility with Standard Chartered Bank by $25.0 million to $125.0 million.

On August 25, 2011, the Company paid the $70.0 million Kinross Gold Corporation's ("Kinross") promissory note plus accrued interest to Kinross from cash on hand.

Note 10: Share Capital


(a) Authorized

    Unlimited common shares without par value.

(b) Issued





                                 Number of shares                Amount

Balance, January 31, 2011              84,159,851     $         502,129

Shares issued for:

Exercise of options                       681,930                 5,163

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

Balance, October 31, 2011              84,841,781     $         509,592



(c) RSU and DSU Plans



RSU                                                     Number of units

Balance, January 31, 2011                                       155,946

Awards and payouts during the
year (net)

RSU awards                                                66,991

RSU payouts                                             (46,963)

Balance, October 31, 2011                                       175,974



DSU                                                     Number of units

Balance, January 31, 2011                                       193,214

Awards and payouts during the
year (net)

DSU awards                                                29,583

DSU payouts                                             (17,127)

Balance, October 31, 2011                                       205,670




During the period, the Company granted 66,991 RSUs (net of forfeitures) and 29,583 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.

Note 11: 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 $0.2 million for calendar 2011.
    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 October 31, 2011, was $80.8 million. The agreement
    specifically provides that these funding requirements will be
    reduced by amounts incurred by the Joint Venture on reclamation and
    abandonment activities.



(b) Participation agreements

    The Joint Venture has signed participation agreements with various
    native groups. These agreements are expected to contribute to the
    social, economic and cultural well-being of the Aboriginal bands.
    The agreements are each for an initial term of twelve years and
    shall be automatically renewed on terms to be agreed for successive
    periods of six years thereafter until termination. The agreements
    terminate in the event that the mine permanently ceases to operate.
    Harry Winston Diamond Corporation's share of the Joint Venture's
    participation agreements as at October 31, 2011 was $1.7 million.



(c) Commitments

    Commitments include the cumulative maximum funding commitments
    secured by letters of credit of the Joint Venture's environmental
    and participation agreements at HWDLP's 40% ownership interest,
    before any reduction of future reclamation activities; and future
    minimum annual rentals under non-cancellable operating and capital
    leases for luxury brand salons and corporate office space, and
    long-term leases for property, land, office premises and a fuel
    tank farm at the Diavik Diamond Mine; and are as follows:







2012                         $   106,962

2013                             103,443

2014                             103,433

2015                             108,094

2016                             106,722

Thereafter                       222,821




Note 12: Capital Management

The Company's capital includes cash and cash equivalents, short-term debt, long-term debt and equity, which includes issued share capital, 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 13: 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 fairvalue 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 October 31, 2011 are considered to approximate their carrying value.

The carrying values of these financial instruments are as follows:


                                    October 31, 2011               January 31, 2011

                            Estimated                      Estimated
                                 fair       Carrying            fair       Carrying
                                value          value           value          value

Financial Assets

Cash and cash      $    83,183     $              $               $
equivalents                                   83,183         108,693        108,693

Accounts                31,819
receivable                                    31,819          22,788         22,788

                          $   115,002     $  115,002     $   131,481     $  131,481

Financial Liabilities

Trade and other    $   113,193     $              $               $
payables                                     113,193         136,490        136,490

Promissory note              -              -          70,000         70,000

Interest-bearing       343,959
loans and borrowings                         343,959         261,836        261,836

                          $   457,152     $  457,152     $   468,326     $  468,326




Note 14: Segmented Information

The Company operates in two segments within the diamond industry, mining and luxury brand, for the three and nine months ended October 31, 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.


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

Sales

Canada              $  36,239     $            -          36,239

United States               -             32,486          32,486

Europe                      -             22,651          22,651

Asia                        -             28,340          28,340

Total sales            36,239             83,477         119,716

Cost of sales

Depreciation and
amortization                  19,340                 57          19,397

All other costs        14,772             41,355          56,127

Total cost of sales    34,112             41,412          75,524

Gross margin                   2,127             42,065          44,192

Gross margin (%)                5.9%              50.4%           36.9%

Selling, general and
administrative expenses

Selling and related
expenses                         966             30,800          31,766

Administrative
expenses                       4,424              9,965          14,389

Total other
operating expenses             5,390             40,765          46,155

Operating profit (loss)      (3,263)              1,300         (1,963)

Finance expense              (2,691)            (1,474)         (4,165)

Exploration costs              (600)                  -           (600)

Finance and other income         256                 33             289

Foreign exchange gain            285                151             436

Segmented profit (loss)    $             $                  $
before income taxes          (6,013)                 10         (6,003)

Segmented assets as at
October 31, 2011

Canada              $ 941,028     $            -     $   941,028

United States               -            443,716         443,716

Other foreign
countries                     57,853            208,012         265,865

                           $ 998,881     $      651,728     $ 1,650,609

Capital expenditures       $  10,796     $        4,050     $    14,846

Other significant non-cash
items:

Deferred income tax $             $                  $
recovery                     (4,190)              (591)         (4,781)




.


For the three months ended
October 31, 2010              Mining       Luxury brand           Total

Sales

Canada              $  60,708     $            -     $    60,708

United States               -             22,555          22,555

Europe                      -             32,655          32,655

Asia                        -             24,959          24,959

Total sales            60,708             80,169         140,877

Cost of sales

Depreciation and
amortization                  14,800                 82          14,882

All other costs        30,239             39,644          69,883

Total cost of sales    45,039             39,726          84,765

Gross margin                  15,669             40,443          56,112

Gross margin (%)               25.8%              50.4%           39.8%

Selling, general and
administrative expenses

Selling and related
expenses                         669             24,717          25,386

Administrative
expenses                       5,562             10,334          15,896

Total other
operating expenses             6,231             35,051          41,282

Operating profit               9,438              5,392          14,830

Finance expense              (2,112)            (1,723)         (3,835)

Exploration costs              (212)                  -           (212)

Finance and other income          63                  6              69

Foreign exchange gain            130                  5             135

Segmented profit before    $             $                  $
income taxes                   7,307              3,680          10,987

Segmented assets as at
October 31, 2010

Canada              $ 952,912     $            -     $   952,912

United States               -            426,077         426,077

Other foreign
countries                     20,725            184,462         205,187

                           $ 973,637     $      610,539     $ 1,584,176

Capital expenditures       $  12,310     $        1,815     $    14,125

Other significant non-cash
items:

Deferred income tax $             $                  $
expense (recovery)           (3,877)                856         (3,021)








For the nine months
ended October 31, 2011      Mining       Luxury brand           Total

Sales

Canada           $  187,882     $            -     $   187,882

United States             -             97,938          97,938

Europe                    -             74,018          74,018

Asia ((a))                -            126,188         126,188

Total sales         187,882            298,144         486,026

Cost of sales

Depreciation and
amortization                52,572                215          52,787

All other costs     102,596            166,770         269,366

Total cost of
sales                      155,168            166,985         322,153

Gross margin                32,714            131,159         163,873

Gross margin (%)             17.4%              44.0%           33.7%

Selling, general and
administrative expenses

Selling and
related expenses             2,392             90,098          92,490

Administrative
expenses                    16,733             28,828          45,561

Total other
operating expenses          19,125            118,926         138,051

Operating profit            13,589             12,233          25,822

Finance expense            (9,171)            (4,160)        (13,331)

Exploration costs          (1,593)                  -         (1,593)

Finance and other
income                         411                219             630

Foreign exchange gain          154                393             547

Segmented profit before $              $                  $
income taxes                 3,390              8,685          12,075

Segmented assets as at
October 31, 2011

Canada           $  941,028     $            -     $   941,028

United States             -            443,716         443,716

Other foreign
countries                   57,853            208,012         265,865

                        $  998,881     $      651,728     $ 1,650,609

Capital expenditures    $   35,880     $        7,338     $    43,218

Other significant
non-cash items:

Deferred income tax     $              $                  $
expense (recovery)        (12,154)              3,954         (8,200)




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


For the nine months ended
October 31, 2010              Mining       Luxury brand           Total

Sales

Canada              $ 196,457     $            -     $   196,457

United States               -             64,235          64,235

Europe                      -             76,793          76,793

Asia                        -             71,120          71,120

Total sales           196,457            212,148         408,605

Cost of sales

Depreciation and
amortization                  40,868                242          41,110

All other costs       102,722            102,442         205,164

Total cost of sales   143,590            102,684         246,274

Gross margin                  52,867            109,464         162,331

Gross margin (%)               26.9%              51.6%           39.7%

Selling, general and
administrative expenses

Selling and related
expenses                       2,066             70,635          72,701

Administrative
expenses                      12,849             29,680          42,529

Total other
operating expenses            14,915            100,315         115,230

Operating profit              37,952              9,149          47,101

Finance expense              (4,766)            (4,934)         (9,700)

Exploration costs              (313)                  -           (313)

Finance and other income         177                214             391

Foreign exchange gain
(loss)                       (1,367)                332         (1,035)

Segmented profit before    $             $                  $
income taxes                  31,683              4,761          36,444

Segmented assets as at
October 31, 2010

Canada              $ 952,912     $            -     $   952,912

United States               -            426,077         426,077

Other foreign
countries                     20,725            184,462         205,187

                           $ 973,637     $      610,539     $ 1,584,176

Capital expenditures       $  32,318     $        2,913     $    35,231

Other significant non-cash
items:

Deferred income tax $             $                  $
expense (recovery)           (1,256)              1,277              21







Note 15: Explanation of Transition to IFRS

As stated in Note 2(a), these are the Company's third consolidated interim financial statements prepared in accordance with IFRS.

The accounting policies described in Note 3 of the April 30, 2011 unaudited interim condensed consolidated financial statements have been applied in preparing: the interim financial statements for the three and nine months ended October 31, 2011, and the comparative information presented in these interim financial statements for both the three and nine months ended October 31, 2010. In preparing these interim financial statements, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS has affected the Company's financial position and financial performance is set out in the following tables and the notes that accompany the tables.

Explanation of Transition to IFRS: Reconciliation of Equity


(in thousands of United States
dollars)

(unaudited)                                          October 31,
                                                     2010

                                                        Effect of
                                                       Transition
                                        Canadian               to
                            Ref.            GAAP             IFRS            IFRS

ASSETS                       (a)

Current assets:

Cash and cash                 $               $                $
equivalents                               85,092                -          85,092

Accounts receivable                27,825              111          27,936

Inventory and
supplies                                 400,732                -         400,732

Other current assets  (b)          32,889          (7,480)          25,409

                                         546,538          (7,369)         539,169

Property, plant and
equipment
- Mining              (c)         785,760         (18,292)         767,468

Property, plant and
equipment
- Luxury brand                     59,739                -          59,739

Intangible assets, net                   128,172                -         128,172

Other non-current assets                  18,158                -          18,158

Deferred income tax assets   (b)          61,805            9,662          71,467

Total assets                         $ 1,600,172     $   (15,999)     $ 1,584,173



LIABILITIES AND EQUITY       (d)

Current liabilities:

Trade and other               $               $                $
payables                     (d)         134,243          (5,979)         128,264

Employee benefit
plans                        (d)               -            7,619           7,619

Income taxes payable               19,379                -          19,379

Bank advances         (d)          23,937         (23,937)               -

Promissory note                    70,000                -          70,000

Interest-bearing
loans and
borrowings     (d)           1,260           24,051          25,311

                                         248,819            1,754         250,573

Interest-bearing loans and
borrowings            (d)         241,447              163         241,610

Employee benefit plans       (e)           4,005            3,501           7,506

Provisions                   (f)          42,880            2,416          45,296

Deferred income tax
liabilities                  (g)         342,884         (49,552)         293,332

Total liabilities                        880,035         (41,718)         838,317

Equity:

Share capital                     501,675                -         501,675

Contributed surplus                15,879                -          15,879

Retained earnings     (h)         166,726           57,371         224,097

Accumulated other
comprehensive
income                       (i)          35,598         (31,652)           3,946

Total shareholders' equity               719,878           25,719         745,597

Non-controlling interest     (j)             259                -             259

Total equity                             720,137           25,719         745,856

Total liabilities and                $               $                $
equity                                 1,600,172         (15,999)       1,584,173






Explanation of Transition to IFRS: Reconciliation of Profit


(in thousands of
United States dollars)

                               For the three months ended October      For the nine months ended October
(unaudited)                                 31, 2010                                31, 2010

                                            Effect of                              Effect of
                                           Transition                             Transition
                                Canadian           to                  Canadian           to
                       Ref.         GAAP         IFRS         IFRS         GAAP         IFRS         IFRS

Sales                       $    140,877 $          - $    140,877 $    408,605 $          - $    408,605

Cost of sales           (k)       85,831      (1,066)       84,765      249,320      (3,046)      246,274

Gross margin                      55,046        1,066       56,112      159,285        3,046      162,331

Selling, general and
administrative
expenses                          41,306         (24)       41,282      115,252         (22)      115,230

Operating profit                  13,740        1,090       14,830       44,033        3,068       47,101

Finance expenses        (l)      (3,338)        (497)      (3,835)      (8,205)      (1,495)      (9,700)

Exploration costs       (m)            -        (212)        (212)            -        (313)        (313)

Finance and other
income                                69                        69          391            -          391

Foreign exchange gain
(loss)                  (n)      (2,960)        3,095          135     (11,433)       10,398      (1,035)

Profit before income
taxes                              7,511        3,476       10,987       24,786       11,658       36,444

Current income tax
expense                              611            -          611        2,922            -        2,922

Deferred income tax
expense (recovery)      (o)        2,222      (5,243)      (3,021)        5,145      (5,124)           21

Net profit                  $      4,678 $      8,719 $     13,397 $     16,719 $     16,782 $     33,501

Attributable to:

Shareholders         $      3,938 $      8,719 $     12,657 $     11,775 $     16,062 $     27,837

Non-controlling
interest                             740            -          740        4,944          720        5,664

Net profit                  $      4,678 $      8,719 $     13,397 $     16,719 $     16,782 $     33,501

Earnings per share

Basic                $       0.05 $       0.10 $       0.15 $       0.15 $       0.20 $       0.35

Fully diluted        $       0.05 $       0.10 $       0.15 $       0.15 $       0.20 $       0.35

Weighted average
number of shares
outstanding                   82,063,200   82,063,200   82,063,200   78,444,841   78,444,841   78,444,841






Explanation of Transition to IFRS: Reconciliation of Comprehensive Income


(in thousands of United
States dollars)

                                  For the three months ended       For the nine months ended
(unaudited)                            October 31, 2010                 October 31, 2010

                                           Effect of                        Effect of
                                          Transition                       Transition
                               Canadian           to            Canadian           to
                        Ref.       GAAP         IFRS     IFRS       GAAP         IFRS     IFRS

Net profit- as above         $    4,678 $      8,719 $ 13,397 $   16,719 $     16,782 $ 33,501

Other comprehensive
income

Net gain on
translation of net
foreign
operations                        4,769          (1)    4,768      6,799          (1)    6,798

Change in fair
value of derivative
financial
instrument                          101            -      101        354            -      354

   Actuarial loss on     (e)
employee benefit plans   (i)          -            -        -          -        (636)    (636)

Total comprehensive          $
income (loss)                     9,548 $      8,718 $ 18,266 $   23,872 $     16,145 $ 40,017

Attributable to:

Shareholders          $    8,808 $      8,718 $ 17,526 $   18,928 $     15,425 $ 34,353

Non-controlling
interest                            740            -      740      4,944          720    5,664

Total comprehensive          $
income (loss)                     9,548 $      8,718 $ 18,266 $   23,872 $     16,145 $ 40,017




References to the Reconciliation of Equity and Profit


(a) Reclassification of assets



    To conform to IFRS presentation requirements, certain asset
    balances have been reclassified to current or non-current asset
    accounts.



(b) Other current assets







                                            Ref.       October 31, 2010

Reclassification of assets                  See  (a) $          (9,773)

Deferred tax impact on intra-group transfer      (i)
of assets                                                         2,293

Net decrease in other current assets                 $          (7,480)





(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.



     During the three months ended October 31, 2010, the accounting
     under IFRS resulted in a reduction of $0.1 million in both
     deferred income tax assets and deferred income tax recovery.



     During the nine months ended October 31, 2010, the accounting
     under IFRS resulted in a reduction of $0.6 million in both
     deferred income tax assets and deferred income tax recovery.





(c)  Property, plant and equipment - Mining







                                          Ref.     October 31, 2010

Derecognition of exploration costs               $
capitalized                                (i)             (17,372)

Remeasurement of the asset retirement
obligation                            See (f)(i)              (920)

Total decrease in property, plant and equipment
- Mining                                         $         (18,292)





(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.



     For the three months ended October 31, 2010, the accounting under
     IFRS increased mining capital assets by $0.4 million, decreased
     cost of goods sold by approximately $0.6 million, and increased
     exploration costs by $0.2 million, reflecting the net impact of
     reversing Canadian GAAP depreciation on capitalized exploration
     costs, partially offset by the expensing of exploration costs
     incurred in the quarter. Deferred income tax liabilities and
     deferred income tax expense both increased by $0.2 million.



     For the nine months ended October 31, 2010, the accounting under
     IFRS increased mining capital assets by $1.3 million, decreased
     cost of goods sold by approximately $1.6 million, and increased
     exploration costs by $0.3 million, reflecting the net impact of
     reversing Canadian GAAP depreciation on capitalized exploration
     costs, partially offset by the expensing of exploration costs
     incurred. Deferred income tax liabilities and deferred income tax
     expense both increased by $0.5 million.





(d) Reclassification of liabilities



    To conform to IFRS presentation requirements, various liability
    balances have been reclassified.





(e) Employee benefit plans







                                               Ref.    October 31, 2010

Retrospective application of IAS 19 employee         $
benefits                                        (i)               5,417

Reclassification of liabilities              See (d)            (1,916)

Net increase in employee benefit plans               $            3,501





(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.



     For the nine months ended October 31, 2010, the accounting under
     IFRS resulted in a $0.6 million increase to the defined benefit
     plan obligation and a corresponding charge to other comprehensive
     income, reflecting the recognition of actuarial losses. A nominal
     change was made to deferred income tax liabilities.





(f) Provisions







                                        Ref.         October 31, 2010

Remeasurement of the asset retirement              $
obligation                              (i)                     2,416





(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.
     There was no further remeasurement of the asset retirement
     obligation from the amount on February 1, 2010.





(g) Deferred income tax liabilities







                                          Ref.         October 31, 2010

Recognition of new deferred tax                      $
balances                                   (i)                 (39,570)

Derecognition of exploration
costs capitalized                     See (c)(i)                (5,016)

Retrospective application of IAS
19 employee benefits                  See (e)(i)                (2,565)

Remeasurement of the asset
retirement obligation                 See (f)(i)                  (985)

Revaluation of deferred income
tax liabilities                           (ii)                  (1,416)

Total decrease in deferred income
tax liabilities                                      $         (49,552)





(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.



     For the three months ended October 31, 2010, the accounting under
     IFRS resulted in an $8.3 million decrease in deferred income tax
     liabilities and an $8.3 million increase in deferred income tax
     recovery.



     For the nine months ended October 31, 2010, the accounting under
     IFRS resulted in a $15.2 million decrease in deferred income tax
     liabilities and a $15.2 million increase in deferred income tax
     recovery. Net profit attributable to non-controlling interest also
     increased by $0.5 million.



(ii) For the three months ended October 31, 2010, the above IFRS
     adjustments to deferred income tax liabilities required a
     revaluation of the account balance, resulting in a $0.3 million
     reduction in deferred income tax liabilities and a corresponding
     increase in deferred income tax recovery.



     For the nine months ended October 31, 2010, the above IFRS
     adjustments to deferred income tax liabilities required a
     revaluation of the account balance, resulting in a $1.4 million
     reduction in deferred income tax liabilities and a corresponding
     increase in deferred income tax recovery. Net profit attributable
     to non-controlling interest also increased nominally.





(h)  Retained earnings



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






                                         Ref.         October 31, 2010

Reset of cumulative translation                     $
differences                         See (i)(i)                  28,800

Recognition of new deferred tax
balances                            See (g)(i)                  37,513

Derecognition of exploration
costs capitalized                   See (c)(i)                (11,668)

Deferred tax impact on
intra-group transfer of assets      See (b)(i)                   2,293

Remeasurement of the asset
retirement obligation               See (f)(i)                 (2,152)

Revaluation of deferred income
tax liabilities                     See (g)(ii)                  1,344

Reacquisition of partnership
units                               See (j)(i)                   1,241

Net increase in retained
earnings                                            $           57,371





(i) Accumulated other comprehensive income







                                         Ref.         October 31, 2010

Reset of cumulative translation                     $
differences                               (i)                 (28,800)

Retrospective application of IAS
19 employee benefits                 See (e)(i)                (2,852)

Total decrease in accumulated
other comprehensive income                          $         (31,652)





(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 as at February 1, 2010 were reset to zero and retained
     earnings was increased by $28.8 million.



(j)  Non-controlling interest







                                         Ref.         October 31, 2010

Derecognition of exploration
costs capitalized                   See (c)(i)                   (689)

Remeasurement of the asset
retirement obligation               See (f)(i)                   (199)

Recognition of new deferred tax
balances                            See (g)(i)                   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                                            $                -





(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.



(k)  Cost of sales







                                      Three months       Nine months
                                             ended             ended
                                       October 31,       October 31,
                         Ref.                 2010              2010

Reclassification
of accretion                        $                  $
expense                   (i)                (497)           (1,495)

Derecognition of
exploration
costs
capitalized          See (c)(i)              (569)           (1,551)

Decrease in cost                    $      (1,066)
of sales                                               $     (3,046)





(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







                                      Three months       Nine months
                                             ended             ended
                                       October 31,       October 31,
                         Ref.                 2010              2010

Reclassification
of accretion                        $                  $
expense              See (k)(i)              (497)           (1,495)





(m)  Exploration costs







                                      Three months       Nine months
                                             ended             ended
                                       October 31,       October 31,
                         Ref.                 2010              2010

Derecognition of
exploration                         $                  $
costs
capitalized          See (c)(i)              (187)             (288)

Reclassification
of exploration
costs                                         (25)              (25)

Increase in
exploration                         $                  $
costs                                        (212)             (313)





(n)  Decrease in foreign exchange loss







                                    Three months            Nine months
                                           ended                  ended
                     Ref.       October 31, 2010       October 31, 2010

Reclassification
of foreign                    $                      $
exchange loss        (i)                   3,095                 10,398





(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 expense (recovery)







                                       Three months       Nine months
                                              ended             ended
                                        October 31,       October 31,
                          Ref.                 2010              2010

Derecognition of
exploration                          $                  $
costs
capitalized          See (c)(i)                 214               505

Recognition of
new deferred
income tax
liability
balances             See (g)(i)             (8,331)          (15,194)

Deferred tax
impact on
intra-group
transfer of
assets               See (b)(i)                  84               583

Reclassification
of foreign
exchange             See (n)(i)               3,095            10,398

Revaluation of
deferred income
tax liabilities      See (g)(ii)              (305)           (1,416)

Total increase
in deferred                                 (5,243)
income tax
expense                              $                  $     (5,124)






To view this news release in HTML formatting, please use the following URL: http://www.newswire.ca/en/releases/archive/December2011/08/c4994.html

SOURCE: Harry Winston Diamond Corporation

Ms. Laura Kiernan, Director, Investor Relations - (212) 315-7934
orlkiernan@harrywinston.com   Ms. Kelley Stamm, Manager, Investor Relations - (416)
205-4380 orkstamm@harrywinston.com
Terms & Conditions     Privacy Policy     harrywinston.com©2010 Harry Winston Diamond Corporation
Increase text sizeDecrease text size