MD&A

Form 51-102F1
Annual Management Discussion and Analysis¹
For
Stornoway Diamond Corporation
(“Stornoway” or the “Company”)

Containing Information up to and including July 16, 2008

Overall Performance

Stornoway has a highly diversified and prospective diamond property portfolio, largely focused in Canada, that includes Renard, a development track diamond project with the potential to become Quebec’s first diamond mine, three advanced projects in eastern Nunavut at the minibulk sampling stage and several early stage grass roots projects throughout Canada in geologically prospective, underexplored regions. Stornoway’s strategy is to capitalize on near-term, small to medium sized diamond mining opportunities to build a growth oriented company that succeeds in the practical business of mining and selling rough diamonds, while at the same time, remains exposed to significant upside through exploration. The rough diamond market continues to strengthen in the face of tightening supply and Stornoway is well positioned to add diamond resources from existing projects and further acquisitions as new opportunities are identified. Subsequent to the successful conclusion of concurrent takeover bids for Ashton Mining of Canada Inc. (“Ashton”) and Contact Diamond Corporation (“Contact”) in January 2007, Stornoway has added depth and expertise to its management and technical teams as a result of the amalgamation. The Company now benefits from experience at each stage of the diamond pipeline from exploration through development and marketing.

As of July 16, 2008, the Company holds interests, directly or through joint ventures, in approximately 30 separate project areas in Nunavut, Alberta, Saskatchewan, Ontario, Québec and the Northwest Territories covering more than 7.7 million acres. This property portfolio can be roughly subdivided into 0.3 million acres of ‘development’ stage projects (the Foxtrot Property), 2.5 million acres of ‘advanced’ exploration properties (Aviat, Churchill, Qilalugaq and Timiskaming) and 4.9 million acres of ‘early stage’ projects (Blackstone, Itza and others) that collectively contain some 150 kimberlite bodies.

Forward-Looking Information

This MD&A contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made based on information currently available to management. When used in this MD&A, the words “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. This MD&A contains forward-looking statements relating to, among other things, regulatory compliance, the sufficiency of current working capital, the estimated cost and availability of funding for the continued exploration and development of the Company’s exploration properties. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties, and assumptions. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements.

Stornoway operates exploration programs on its development stage projects, three of the four advanced projects and the majority of the early stage projects. Highlights of the year ended April 30, 2008 and the period shortly thereafter include:

• Completion of field work associated with an aggressive $23 million exploration program on 20 of Stornoway’s diamond projects. Key components of this exploration program included the completion of a 10,000 tonne bulk sampling program at Renard, early stage regional exploration at Foxtrot, a 356-tonne mini-bulk sample program at Churchill, drilling and mini-bulk sampling at Aviat, mini-bulk sampling at Qilalugaq and early stage exploration on other prospective properties throughout Canada;
• The recovery of 6,497 carats from the diamond recovery phase of the Renard bulk sample program which subsequently underwent an independent, open market valuation in Antwerp, Belgium in September 2007 that was later updated to reflect prevailing market conditions in March 2008;
• Commencement of pre-feasibility study work, designed to evaluate potential mining scenarios at the Renard project in north-central Quebec, with the engagement of AMEC Americas Ltd. (“AMEC”) and Agnico-Eagle Mines Ltd. (“Agnico-Eagle”) and the decision, made jointly with Soquem, to proceed to Phase 2 of the pre-feasibility study upon receipt of the 2007 bulk sampling results;
• Newly determined “base case” diamond price model for the Lynx kimberlite dyke of US$66 per carat.
• Monetization of a non-core exploration asset with the sale of Stornoway’s 45% interest in the Buffalo Head Hills project in north-central Alberta for cash consideration of $15 million and common shares with a fair value of $1.9 million at closing;
• The appointment of Mr. Yves Harvey to the Company’s board of directors.
• A diamond content of 162 carats per hundred tonnes (cpht) from DMS processing of 20.6 dry tonnes from the AV267 kimberlite, including the recovery of a 3.64 carat gem quality white dodecahedron, the largest stone from the Aviat Project, Nunavut to date;
• Acquisition of BHP Billiton Diamonds Inc.’s 14.4% interest in the Aviat Project, bringing Stornoway’s project interest to 90% (Hunter holds a 10% interest, carried to production), and its diamond marketing rights to 100%;
• Mobilization of crews for the 2008 exploration program at Aviat (work to include ground geophysics and drilling at the recently discovered AV9 kimberlite pipe, drilling on the AV267 sheet in support of a conceptual resource study and collection of a 150-200 tonne bulk sample from the AV267 body);
• In July 2008, a private placement agreement with the holders of the $20.0 million principal convertible debentures for the issuance of 24,444,444 common shares at $0.90 per share for gross proceeds of $22.0 million. The gross proceeds from this private placement will be used to repay the $20.0 principal of the convertible debentures and to pay a $2.0 million early redemption payment to the two holders of the convertible debentures. This private placement is subject to regulatory approval. Upon completion of this financing, the Company will be debt-free.

The Company’s net loss for the year ended April 30, 2008 (the “Current Year”) of $27.5 million (a loss of $0.14 per share) was significantly more than the loss of $19.1 million ($0.15 loss per share) for the year ended April 30, 2007 (the “Comparative Year”) due a $26.3 million resource property write-off during the Current Year (Comparative Year - $16.5 million) and a loss of $5.5 million (Comparative Year - $nil) on the sale of a mineral property interest. Included in the Current Year’s loss is a $513,000 write-down on an investment where the decline in its fair value is deemed to be permanent (Comparative Year - $nil). In the Comparative Year, the results of operations for both Ashton and Contact have been included in the Company’s results from operations from September 20, 2006, the date of control. These acquisitions were accounted for as a purchase of assets.

Assets decreased from $226.1 million at the end of the Comparative Year to $193.7 million at April 30, 2008 with capitalized resource property costs decreasing from $194.0 million to $173.7 million at April 30, 2008. The Company’s cash and cash equivalents decreased during the Current Year, from $21.5 million to $9.5 million as at April 30, 2008. The Company’s primary focus during the Current Year continued to be the advancement of its exploration projects, with expenditures totaling $23.5 million in the Current Year, as compared to expenditures of $27.5 million in the Comparative Year. During the Comparative Year, the Company borrowed, and subsequently repaid $23.85 million from a bridge facility, which was used to finance the Ashton acquisition. Proceeds from the sale of $20.0 million in convertible debentures were used to pay off the bridge facility in March 2007. The convertible debentures bear interest at 12% per annum and mature March 16, 2009. The Company has no right of pre-payment. From the date of issuance in March 2007, the Company has made cash payments totaling $1,200,000 and issued 3,430,234 common shares with a fair value of $1,800,000 in settlement of the quarterly interest payments.

The Company’s administrative expenses were significantly higher in the Comparative Year due to the take-over bids for Ashton and Contact that commenced in August 2006 and completed in January 2007. The results of operations for each of Ashton and Contact have been included from September 20, 2006. In comparison, administrative expenses decreased in the Current Year, with the most significant decline being professional fees, from $2.0 million in the Comparative Year to $393,000 in the Current Year. Salary expense also decreased from the Comparative Year ($1.4 million) to the Current Year ($1.1 million). The Company’s net loss for the Current Year was also influenced by a $5.5 million loss from the sale of a mineral property interest (Comparative Year - $nil) and by a future income tax recovery of $8.3 million (Comparative Year - $2.1 million).